Yahoo (YHOO, news, msgs) isn't going down without a fight.
The Internet company is still talking to Time Warner's (TWX, news, msgs) AOL about joining its Internet operations, The Wall Street Journal reported late Wednesday, in an effort to prevent a possible takeover of Yahoo by Microsoft (MSFT, news, msgs).
Terms of deal would have Time Warner providing a cash investment to Yahoo, and would merge AOL into Yahoo, while in exchange Time Warner would receive a 20% stake in a combined AOL-Yahoo company, the paper reported.
Shares of Yahoo rose 81 cents, or 2.9%, to $28.58 in midday trading, and Microsoft shares added 38 cents, or 1.3%, to $29.27.
The deal with Yahoo would value AOL at roughly $10 billion, the report said. It would not include AOL's dial-up business. The deal was nowhere close to done, a source told the paper. There's still "a lot of work to do," a person close to the situation told the Journal.
Time Warner has been struggling with the burden of AOL since the two companies merged in 2000, just in time for the collapse of the initial internet boom.
The Journal's report comes just days after Microsoft gave Yahoo a three-week deadline to accept Microsoft's $31-per-share offer.
Microsoft announced the deadline in an open letter to the Yahoo board on Saturday; Yahoo responded on Sunday, saying it isn't unalterably opposed to a deal, but believes the offer is too low. (Microsoft is the publisher of MSN Money.)
Another trick up Yahoo's sleeve
Meanwhile, Yahoo late Wednesday said it will test rival Google's (GOOG, news, msgs) Web search advertising on its site. Yahoo said the test of Google's AdSense service will last up to two weeks and will involve no more than 3% of its search queries.
Microsoft was quick to respond to the deal, calling it anticompetitive.
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"Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google's hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," Microsoft said in a press release. "We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo! shareholders full and fair value for their shares."
The news about cooperation between Yahoo and Google drew notice in the nation's capital, as well.
"We will be following closely the results of the short-term test alliance between Yahoo and Google," said Sen. Herb Kohl, D-Wis., chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights, in a statement issued shortly after Yahoo's announcement.
Reaction to the battle
A major Yahoo shareholder was not pleased with Microsoft's threat over the weekend.
Legg Mason portfolio manager Bill Miller told The Wall Street Journal on Tuesday that Microsoft CEO's deadline was "counterproductive."
"If Microsoft raises the offer, the pressure shifts very quickly to Yahoo to negotiate," Miller told the paper. "To me, bumping the number up a buck, that would have a big impact psychologically on shareholders."
Miller also told the paper that he was uncertain that Yahoo would be able to find a better alternative for its shareholders. As of December 31, 2007, Legg Mason had about a 7% stake in Yahoo.
Analysts had a lot to say about the back-and-forth between Microsoft and Yahoo as well.
"Yahoo has made a really clever move here. It looked like Microsoft had all the cards, Yahoo is at least now able to use this for leverage to get Microsoft to pay more," Cowen and Co. analyst Jim Friedland told Reuters.
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