AOL talks with Microsoft and Yahoo heat up

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The structure of any deal is not immediately clear, though a combination of any of the parties is expected to redraw the landscape for advertising on the Internet.

Sources had said earlier that a deal with Yahoo would likely involve merging AOL with the Web pioneer, with Time Warner taking a minority stake in the combined company. A deal with Microsoft would likely be a sale of AOL, the sources said.

Time Warner and Microsoft declined comment. A representatives of Yahoo was not immediately available.

Time Warner's talks come after Microsoft's buyout talks with Yahoo fell apart, with Microsoft withdrawing its $47.5 billion (23.7 billion pound) bid in May. Since then the two have waged a public war of words.

Discussions with Time Warner have accelerated as both Yahoo and Microsoft view AOL as potentially beneficial to leverage their positions in the Internet marketplace, where Google Inc dominates.

AOL plans to split its dial-up Internet business and has focused on building a one-stop online advertising shop over the past two years.

Yahoo's interest in AOL is designed to show shareholders that it could grow without Microsoft.

Yahoo needs to be convincing because it faces a proxy battle against activist investor Carl Icahn on Aug 1. Icahn, who owns about 5 percent of Yahoo shares, has aligned himself with Microsoft, and seeks to replace Yahoo's board and oust CEO Jerry Yang.

Icahn this week said he and Microsoft had structured a deal to buy out Yahoo's search advertising business that would have guaranteed Yahoo $2.3 billion in search revenue annually for up to 10 years assuming Yahoo's audience remained intact and the parties renewed after five years.

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