Yahoo Exploring Merger With AOL in Order to Thwart Microsoft Takeover

Yahoo Inc. and Time Warner Inc. have stepped up talks over creating an alternative to Microsoft Corp.'s unsolicited offer for Yahoo, people familiar with the matter said. The talks center on a deal that would fold Time Warner's AOL Internet unit into Yahoo, these people said, though they still consider a Yahoo purchase by Microsoft as the most likely outcome. The Time Warner talks have stepped up as Yahoo tries to nail down its alternatives to Microsoft's Feb. 1 offer, which Yahoo rejected as undervaluing it. The scenario under discussion would involve folding AOL into Yahoo with Time Warner taking a sizable minority stake in the combined entity, say the people familiar with the matter. They say that Yahoo and Time Warner had an earlier round of discussions, but talks intensified recently after Yahoo went back to Time Warner to ask for a proposal that it could take to Yahoo directors. Time Warner is putting the finishing touches on that proposal now. The people familiar with the matter say that the companies estimate about $1 billion in cost savings annually.
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