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Friday, October 31, 2008

Yahoo, AOL in due diligence on combination: source


By Anupreeta Das

SAN FRANCISCO (Reuters) - Yahoo Inc and Time Warner Inc's AOL unit are looking at each other's books to figure out how much money they could make together and where costs can be saved, a person familiar with the talks said on Wednesday, indicating a merger may finally be on the way.

While noting a deal was not imminent, the source said the two companies have engaged in "meaningful" due diligence about a possible combination for the past couple of weeks.

Talks are focused on how to integrate AOL's content and advertising business into Yahoo, said the source, who was not authorized 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 takeover bid from Microsoft Corp.

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

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.

Time Warner shares are down about 45 percent from year-earlier levels, while Yahoo shares have fallen about 63 percent, 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. News of the due diligence was first reported by the AllThingsDigital blog.

Shares of Yahoo were up 4 cents at $12.40 in late trading, while Time Warner shares were down 15 cents or 1.5 percent at

$9.95.

(Editing by Gerald E. McCormick and Brian Moss)

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