AOL deal may omit stake sale

By Saul Hansell
The New York Times

Published: December 5, 2005, 10:40 PM PST

TalkBack

E-mail

TrackBack

Time Warner may not be selling a piece of America Online after all.

Time Warner is still in negotiations with Microsoft and Google over a variety of potential deals involving its AOL unit. But most of the possibilities under discussion do not involve either company's buying a stake in AOL, an executive briefed on the negotiations said Monday. Rather, they would involve cooperation on Web search, advertising sales and possibly other areas, the executive said.

Richard Parsons, the chief executive of Time Warner, could settle on a deal with one of the companies in the next week or two, said the executive, who described the state of the talks on condition that he not be identified because of the confidential nature of the deal making.



	For the latest breaking news, visit NYTimes.com Sign up to receive top headlines Get Dealbook, a daily corporate finance email briefing Search the jobs listings at NYTimes.com Search NYTimes.com:

Representatives of Time Warner, Google and Microsoft said their companies would not discuss any potential negotiations.

Time Warner's leadership has been under pressure from the financier Carl C. Icahn, who asserts that the company is mismanaged and undervalued and has hired Lazard to explore options for splitting it up.

The current proposals related to America Online are significantly narrower than those under discussion earlier this year, which began when Microsoft bid to become the provider of Web search on AOL, displacing Google. Those talks quickly expanded to explore a merger of Microsoft's MSN portal and Internet service business into AOL. That structure, and possibly cash as well, would have made Microsoft a large minority owner of AOL, which might as a next step sell some shares to the public.

This had great appeal to Time Warner, as it would set an independent value for its AOL unit, which it feels has been unappreciated by investors. It also offered the potential to combine two rivals, the better to battle Google and Yahoo.

When Google got wind of Microsoft's talks, it approached Time Warner to propose a potential investment and other arrangements that would keep AOL as a provider of Google's search and a distributor of its advertising. AOL is the largest source of search traffic for Google after its own Web sites.

Time Warner wanted a deal that valued AOL at more than $20 billion, and at various times both Microsoft and Google informally discussed transactions that would meet that demand, the executive briefed on the talks said.

But as talks proceeded, the executive said, both Google and Microsoft backed off from their more expansive proposals.

By this account, Google, which values its neutrality, is making proposals that do not involve an investment in AOL at all. It would offer to give AOL an even greater share of the revenue--currently about 80 percent--from search-based advertising placed on AOL sites. Google would also find ways to drive traffic from its sites to AOL.com.

For its part, America Online is hoping that ad revenue from that free Web site will compensate for the decline in its Internet access subscription business. Currently Google is not interested in cooperation with AOL on instant messaging or ad sales, the executive briefed on the talks said.

Comcast had approached Google about joining in a possible deal with America Online, but those discussions have largely been set aside because Time Warner wanted a simpler form for negotiating. Were Time Warner to proceed with Google, options that may give Comcast a role would be discussed in a second phase, two executives involved in that aspect of the negotiations said.

Microsoft's bid to AOL is in flux, one executive briefed on the negotiations said, but most of its proposals no longer involve its taking an ownership stake in America Online.

In addition to Microsoft's search technology, some options involve a joint venture between AOL and Microsoft in advertising sales. The companies are also said to be discussing linking their instant-messaging systems, but since these systems are seen as critical drivers of customer loyalty, it is a delicate area.

In other news:

Over the last few months, Microsoft has been reorganizing its Internet operation and merging it with the organization that makes Windows, its most important product. Indeed, it has developed a series of Internet services to be marketed under the Windows Live brand. At the same time, it is expanding the group that operates the MSN.com portal, a direct rival to AOL.com.

Of course, competitors cooperate in the complex world of the Internet. Until it developed its own Web search, Microsoft used Yahoo's search technology. And AOL competes with Google in many areas even as it earns money by using Google for search.

Jordan Rohan, an analyst with RBC Capital Markets, said he felt that Mr. Parsons had always preferred to keep substantial control of America Online and was mainly seeking the best terms for the right to provide search on AOL.

"Parsons has done a masterful job of making it look like AOL was for sale when I don't think it was," he said. "The most likely outcome is simply an improvement in the terms AOL gets from Google."

Richard Siklos contributed reporting for this article.