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AOL May Become Object Of Microsoft, Yahoo, Google's Desires
http://money.cnn.com/news/newsfeeds/articles/djf500/200807211624DOWJONESDJONLINE000487_FORTUNE5.htm

July 21, 2008: 04:24 PM EST


The future of Time Warner Inc's (TWX) embattled online unit AOL now
could become the focus of the Internet industry following Yahoo Inc.'s
(YHOO) truce with activist investor Carl Icahn.

Ongoing talks about a deal for AOL between Time Warner and Internet
giants - like Yahoo, Google Inc. (GOOG) and Microsoft Corp. (MSFT) -
have heated up since Microsoft's formal bid to acquire Yahoo was
rebuffed by Yang in July, according to a source familiar with the
situation. Those talks may further intensify, now that Yahoo may no
longer be in play.

Yahoo could have the lead, considering Icahn's connections with Time
Warner, where he owns nearly 13 million shares as of March 31. Plus,
Icahn's list for potential new directors at Yahoo includes Jonathan
Miller, the former chief executive of AOL, perhaps indicating that
Icahn may soon push Yahoo to go after the Time Warner unit.

Meanwhile, Microsoft, if it continues to refuse to deal with Yahoo's
current management, which remains in place, might view AOL as a
consolation prize in its bid to close the gap with rival Google in
online advertising.

Google, for its part, already owns a 5% stake in AOL and powers the
search engine at its portal, so it could scoop up control of AOL just
to maintain its search dominance and add a few more attractive online
properties to its arsenal, like MapQuest and AOL's popular instant
messenger.

Icahn could not be reached for comment. Spokesmen for Time Warner and
Yahoo declined to comment, and representatives at Google and Microsoft
could not be reached.

With fresh deal speculation swirling and yet another economic slowdown
at hand, buyers are balancing their ambition to dominate the fast-
growing online media market with pressures from shareholders to avoid
overspending.

"All these companies are looking at an AOL bid as an aggressive move
to show dominance, but that just seems like an alpha-dog move to me,"
says Forrester Research analyst Shar VanBoskirk. "I'd rather be the
dog that actually knows what I'm doing than the one that tries to show
off itself as better than everyone else."

At the same time, economic conditions are worsening and last week's
earnings results from Google and Microsoft signaled that online
advertising is not immune to the pressures weighing on other sectors.

Likewise, AOL's second-quarter results due out Aug. 6 will be closely
scrutinized by suitors with an eye towards a possibly dwindling price
tag. In the first quarter, AOL's earnings dropped by 74% and its
display-advertising revenue was down an alarming 18%. Shares of its
parent company have fallen 11% this year on top of their 70% slide
since AOL acquired the company in 2001 for $ 124 billion - a deal now
viewed as one of the worst missteps in corporate history.

If analysts' predictions are to be trusted, the stakes are high.
PricewaterhouseCoopers projects online advertising to grow at a 19.5%
compound annual growth rate to $120 billion in 2012. By then, the
Internet is expected to make up 19% of global advertising, up from 10%
in 2007.

The fastest-growing segment, paid search advertising, is ruled by
Google, which is expected to claim 76% of the market this year by
revenue, up from last year's 68%, according to eMarketer. Yahoo comes
in second, expected to have 7% of the market this year, down from 9%.

Microsoft doesn't break out its search revenue, but by audience
measured in unique visitors, it comes in at a distant third with 9.2%
of the search market in June, according to ComScore, which explains
its interest in acquiring Yahoo. AOL lagged with just 4.1% of the
market, so Microsoft or Yahoo could presumably swipe that chunk of the
audience away from Google by acquiring AOL and getting out of its
existing contract with the search king.

AOL is stronger in the banner and display advertising market with its
PlatformA/Advertising.com network. According to ComScore, AOL ranked
third with 5.9% of that market in April behind Yahoo and first-place
Fox Interactive Media, a division of News Corp. (NWS), which owns
social networking giant MySpace as well as this newswire. Despite
other signs of weakness, AOL's audience at its content sites, like its
popular celebrity gossip destination TMZ.com, showed impressive growth
in the first quarter.

"Even if people go to other sites to do searches, they're still coming
back to the AOL's portal because of the all the content value it
provides," says VanBoskirk.

Google, which placed a distant fifth-place in banner and display in
April with just 1.4% of the market, could be tempted to pursue AOL to
beef up its position there. It paid $1 billion for its 5% stake in AOL
in 2005, a price that values the whole company at $20 billion. Gabelli
& Co. analyst Robert Haley says Google paid a premium for its stake,
and a more likely price tag for AOL in today's market would value it
closer to $10 billion.

Haley says Yahoo and Microsoft are more likely buyers, given their
interest in building up premium Web content. Of those two, Microsoft
is the stronger buyer with $10.3 billion in cash on its balance ***
as of June 30. Yahoo had just $ 2.8 billion in cash on hand at the end
of its first quarter, and its shareholders would be less supportive of
a deal with its stock already trading well below Microsoft's offering
price that Yang rejected in a controversial move aimed at producing a
better offer that has not been forthcoming.

Whether the addition of Miller to its board could help Yahoo's
standing in a bid for AOL remains to be seen. After taking the helm at
AOL in 2002, the executive who had previously run web operations like
Home Shopping Network, Expedia Inc. and Ticketmaster for Barry
Diller's IAC/Interactive Corp. (IACI), was replaced in 2006 by AOL's
current CEO, Randi Falco, a former NBC executive. Miller's exit came
as AOL was transitioning from a subscription-based business model to
an advertising model, a move that analysts view as preparation for a
sale to a larger web company.

Icahn reiterated his support for a sale of Yahoo on Monday. Yahoo has
said it would sell itself to Microsoft for $33 a share. Microsoft has
said it's still interested in buying Yahoo's search business or the
whole company as long as there's a new board of directors in place for
negotiations.

"It's unclear if (Microsoft) would consider dealing with Yahoo after
Icahn and his associates join the board, or whether it will flat out
refuse to deal with Yang," says Haley. "Now, it looks like they'd have
a more willing seller at Time Warner."

On Monday, Yahoo said it reached a settlement with Icahn by offering
him three new seats on its board of directors. The agreement heads off
a proxy fight for control of the No. 2 online search firm at its
upcoming shareholders meeting on Aug. 1.

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