AOL-Yahoo! Versus Microsoft-Yahoo!...???? (YHOO, TWX, MSFT, GOOG, IACI)

There is a report out of the Wall Street Journal that Yahoo! Inc. (NASDAQ: YHOO) and Time Warner Inc. (NYSE: TWX) may be close to inking a deal that would potentially combine Internet operations of the web giants.  Obviously, this would be directed right at thwarting the current attempts by Microsoft (NASDAQ: MSFT) to acquire Yahoo!.

According to the WSJ, Time Warner would make a large cash investment into Yahoo! and then Yahoo! would repurchase "billions of dollars" worth of its own shares in the mid-$30’s.  While this is an attempt from Jerry Yang to fetch a higher valuation, there is no guarantee that any such valuation would net a higher return for shareholders.  There were headlines earlier today tying Yahoo! into running some "test search-ads" via Google (NASDAQ: GOOG).  Google still owns 5% of AOL as well. 

We have considered all the possibilities in a similar situation, and what the ramifications for other Internet and media players out there.  For starters, we’d even call it a rumor, and we’d even note the possibility that this could be a "test announcement" from the companies to see what the reaction would be if such a deal was formally struck (that wouldn’t be the first time any company has done that).  This entire situation should still all be considered hearsay at this point as there have been no press releases issued by any of the companies on any such merger terms, investment terms, and ad terms.  If it is real, then we’d be expecting a press release from one of the companies at some point by Thursday or Friday… if not sooner.

There are also no assurances that the shareholders of any of the Yahoo!-Microsoft-Time Warner trifecta would even back such efforts or anything at all related.  There are not even assurances that this would net more money to Yahoo! shareholders in the end. 

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This might also drive up the price of poker over at IAC/Interactive (NASDAQ: IACI) and play right into our most recent special situation newsletter scenarios.

Jon C. Ogg
April 9, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at [email protected] and he does not own securities in the companies he covers.