Yahoo! Inc is close to an agreement to combine operations with Time Warner Inc's AOL unit in a bid to fend off Microsoft Corp's $44.6 billion takeover offer, a source said.

Yahoo would gain control of AOL, receive an investment from Time Warner, and give up a 20 percent stake in the combined entity, said the source, who asked not to be identified because the talks aren't public. The investment would let Yahoo buy back billions of dollars of its own stock, the source said.

Chief Executive Officer Jerry Yang is racing to find alternatives to Microsoft's $31-a-share bid as the prospect of a proxy battle looms. Yahoo said it would display some Web search advertising links sold by Google Inc, a move that may give Yahoo more time to convince investors it can remain an independent company.

"Yahoo is a very attractive company and going forward, I think they could benefit from cooperation with other Internet companies," said Yasuhiko Hirakawa, who manages $80 billion of assets at DIAM Co in Tokyo, including Yahoo shares. "Consolidation is definitely a trend for the Internet."

Diana Wong, a spokeswoman for Sunnyvale, California-based Yahoo, didn't return a call for comment. Time Warner spokesman Ed Adler declined to comment.

The talks with AOL and Google, owner of the most-used Internet search engine, indicate that Yang, 39, is making progress two months after telling investors that the company is seeking alternatives to Microsoft's bid. Microsoft's offer was 62 percent higher than Yahoo's closing price the previous day.

"They're delay tactics," Laura Martin, an analyst at New York-based Soleil Securities Corp, said of Yahoo's actions. She rates Yahoo shares "hold" and doesn't own any. "They're just going to irritate Microsoft and accelerate a proxy fight."

Separately, the New York Times reported that News Corp is in talks to join Microsoft's bid for Yahoo, citing people involved in the discussions. The deal would combine Yahoo, Microsoft's MSN and News Corp's MySpace, the report said.

Microsoft spokesman Frank Shaw didn't return a call seeking comment. Teri Everett, a spokeswoman for New York-based News Corp, said the company doesn't comment on "speculation".

Yahoo, owner of the most-visited US website, rose 7 cents to $27.77 on the NASDAQ. After jumping 48 percent on Feb 1, the day after Microsoft's bid, the stock has declined 2.1 percent.

Time Warner, the world's largest media company, fell 30 cents to $14.43 in New York Stock Exchange composite trading. Shares of the New York-based company have declined 13 percent this year.

Microsoft CEO Steve Ballmer is pursuing Yahoo to challenge Google's dominance of the $41 billion online ad market. Ballmer, 52, said in an Apr 5 letter that Yahoo has three weeks to accept a deal or become the target of the company's first hostile takeover. Yahoo responded to Microsoft's threat of a proxy fight by insisting on a higher price.

"We continue to believe a Microsoft-Yahoo deal is the most likely outcome and continue to believe that it will happen at a higher price than the initial $31 bid," Citigroup Inc analysts Mark Mahaney and Brent Thill wrote in a report yesterday.

A combination with AOL would bring together the second and fourth most-used Internet search engines in the US Google is the most popular, attracting 59.2 percent of queries in February, according to Reston, Virginia-based researcher ComScore Inc.

Agencies

(China Daily 04/11/2008 page16)