Yahoo and AOL in merger discussions

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A tie-up between Yahoo and AOL-Time Warner is on the cards as sources claim the two companies are conducting due diligence to see how much revenue a merger might generate and how much cash it could save them.

The source said that discussions had been going on for a couple of weeks, but noted that a deal was not necessarily imminent.

Talks are focused on how to integrate AOL's content and advertising business into Yahoo, said the source, who was not authorised to speak publicly because the discussions are confidential.

Yahoo and Time Warner began talks several months ago, when the internet company was looking for an alternative growth strategy to fend off a $47.5 billion (£28.8 billion) takeover bid from Microsoft.

Yahoo had repeatedly rejected Microsoft, which finally withdrew its $33 (£20.01)-per-share proposal in June after Yahoo cut a search advertising partnership with Google.

But the Google deal, also part of Yahoo's alternative strategy, is mired in the regulatory process because critics have said it is anti-competitive. Meanwhile, Yahoo shares have plunged to around $12 (£7.27).

Time Warner shares are down about 45 per cent from year-earlier levels, while Yahoo shares have fallen about 63 per cent, as fears of an economic recession curbed corporate spending on advertising, while Google continued to dominate in the web search market.

Under the deal Yahoo and Time Warner have discussed, Yahoo would fold AOL's content and advertising business into its own operations, and Time Warner would get a stake in the combined company.

Executives and advisers from both sides met last week as part of the due diligence process, the source said. Both sides are being cautious because any potential deal carries "a lot of risk," the source said, without providing further details.

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.

Yahoo and Time Warner declined comment.

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