Yahoo Inc and media conglomerate Time Warner Inc have stepped up talks to create an alternative to Microsoft Corp's offer to take over the Web company.
The talks focus on a deal that would fold Time Warner's AOL Internet unit into Yahoo, according to the people, who still consider a Yahoo purchase by Microsoft as the most likely outcome.
Last month Microsoft made an offer to buy Yahoo, which was rejected as undervaluing the business.
Microsoft and Yahoo pursued merger discussions in 2005, 2006, and 2007, that were all ultimately unsuccessful. At the time, analysts were skeptical about the wisdom of a business combination. On February 1, 2008 , after its friendly takeover offer was rebuffed by Yahoo, Microsoft made an unsolicited takeover bid to buy Yahoo for US$44.6 billion dollars in cash and stock. Days later, Yahoo considered alternatives to the merger with Microsoft, including a merger with internet giant Google. However, on February 11, 2008, Yahoo decided to reject Microsoft's offer as "substantially undervaluing" Yahoo's brand, audience, investments, and growth prospects.
Time Warner faces industry competition from traditional media companies such as CBS Corporation, The Walt Disney Company, News Corporation, and Viacom, as well as online search portals such as Yahoo!, and Google for competition of viewer attention which translates to ad sales. According to the recent 10Q, in order to remain competitive, Time Warner and AOL must keep pace with rapid technological changes on the internet. Time Warner's business may be severely impacted by the increasing “piracy” of feature films, television programming and other content which decreases company revenues.