Yahoo is nearing a deal with America Online to combine the two struggling companies' Internet operations, the Wall Street Journal reported Wednesday.
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An alliance with AOL would help Yahoo thwart a hostile takeover bid by US software giant Microsoft, which is trying to buy the pioneering California Internet firm in a stock and cash deal originally valued at 44.6 billion dollars.
Faded Internet star AOL, meanwhile, is eager to regain the luster of its stardom in the early days of the world wide web and find a new identity that renews its popularity.
Time Warner would reportedly merge AOL into Yahoo and pay for a 20 percent ownership of the combined company, according to the Journal.
Yahoo would supposedly use the cash to buy back shares from some of the very stockholders Microsoft is threatening to woo in an effort to have Yahoo's board of directors ousted and replaced with people amenable to the takeover.
Talk of an AOL tie-up and massive stock buy-backs by Yahoo come as the firm's board of directors vows to explore all options to avoid having Microsoft's unsolicited offer shoved down its throat.
Yahoo is even apparently seeking help from longtime rival Google, whose dominance in Internet advertising is among the reasons Yahoo's revenues and share of the market have been eroding.
The company announced Wednesday it will launch a limited test of Google's AdSense for Search service, and in doing so, drew a sharp response from Microsoft.
"Any definitive agreement between Yahoo and Google would consolidate over 90 percent of the search advertising market in Google's hands," said Brad Smith, Microsoft's general counsel, in a statement.
He added: "This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo. We will assess closely all of our options."
Yahoo's AdSense test is to last up to two weeks and be limited to no more than three percent of Yahoo search queries. The program will deliver Google ads alongside Yahoo's own search results.
