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Update: Now WSJ is reporting the same thing, three hours later: that Yahoo (NSDQ: YHOO) and AOL (NYSE: TWX) are in serious advanced talks on combining. Under the plan being discussed, Time Warner would fold its AOL unit into Yahoo and make a cash investment in return for about 20 percent of the combined entity. The deal will value AOL at about $10 billion, without the ISP business. Yahoo would use the Time Warner cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere in the middle of the range between $30 and $40 a share, the story says.
Original post: Well, with its announcement of a two-week Adsense trial, Yahoo is finally playing a very public hand with Google (NSDQ: GOOG) — thus raising the stakes even across during Microsoft’s (NSDQ: MSFT) three-week deadline. But the real drama is behind scenes where Yahoo is still talking to Time Warner — despite the observers who say any such talks must be fruitless because nothing has happened yet. We do know from sources that Time Warner is very serious now about a deal with Yahoo, and because of Google’s relationship with AOL (5 percent owner) and now this Yahoo test, it could all come together pretty quickly, possibly even next week before the test is over.
If Yahoo can logically show that it gets a 30-40 percent revenue lift on the test, then they have a story to tell — that, if combined with AOL, they have enough scale, cut down costs by outsourcing search and search ads to Google, and add to that a possible share buyback with Time Warner supplying the extra cash, the combination has earned the right to stay independent.
Of course, this could all be shut down in the next five minutes by a Microsoft bid increase to $34-35 a share, instead of its current threats. That still could happen but Redmond’s public response for now is regulatory roulette: it will never happen because Google would have too much of the market.