• Reuters, Thursday, October 30, 2008 11:45 AM

Yahoo and Time Warner's AOL unit continue to discuss a possible merger, a person familiar with the talks told Reuters on Wednesday. The two companies are looking at each other's books to figure out how much money they could make together and where costs can be saved.

While noting a deal was not imminent, the source said the two companies have engaged in "meaningful" due diligence about a possible combination for the past couple of weeks. Talks began several months ago, when Yahoo was looking for an alternative growth strategy to fend off a $47.5 billion takeover bid from Microsoft.

One possible scenario is Yahoo would fold AOL's content and advertising business into its own operations, and Time Warner would get a stake in the combined company. Integration concerns would likely revolve around how to fold AOL's advertising network into Yahoo's operations, choosing whether to keep separate portals and email services, and squeezing out cost savings by reducing duplication, one former AOL executive said on condition of anonymity.

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