Yahoo and AOL Look at Tying the Knot

Yahoo and AOL are reportedly looking at each others' books and in serious talks about how combining their businesses.

After repeatedly spurning Microsoft during much of 2008, reports are now circulating that Yahoo is now considering a combination with Time-Warner’s AOL division to bolster its sagging bottom line…and while no deal is on the table, the companies are performing due diligence and looking at each others books to see how a combined operation might work out.

Although Yahoo and Time Warner have been in talks about AOL for several months—dating back to when Microsoft’s high-dollar takeover offer for Yahoo was still on the table—according to sources in both companies and media reports from Reuters and other sources, the companies have been engaged in serious talks since mid-October. The companies have discussed how AOL’s online advertising business and content offerings might be integrated into Yahoo. AOL also offers several services that compete with Yahoo’s email, photo sharing, and instant messaging applications; no information is available on how the companies might deal with such overlapping services, although AOL is currently in the process of shuttering some of its less-popular offerings. It would make sense that a combined operation would look to reduce costs by eliminating duplicate services.

Integrating AOL’s online advertising platform with Yahoo might raise regulatory flags; the online advertising market is already raising serious concerns about a search advertising partnership between Google and Microsoft. Google is the dominant Internet search engine in terms of market share, but Yahoo is strong (but distant) second place, head and shoulders above competitors like Microsoft, AOL, and Ask.com which seem mired in single-digit market shares. However, Yahoo’s share of the search market has been eroding in recent months, as Google continues to expand its lead and competitors slowly grow their user bases.

Time Warner has made no secret of its desire to divest itself of it’s AOL unit; although the merger between AOL and Time-Warner was, at the time, one of the biggest business and media deals in history, the partnership soured over the years and Time Warner has found it increasingly difficult to manage being both a content producer and content distributor.