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AOL Intensifies Talks With Microsoft, Yahoo?

Shares in Time Warner (NYSE: TWX) rose 4.7 percent on Wednesday after Reuters reported that talks to sell its AOL Internet unit to Yahoo (NASDAQ: YHOO) or Microsoft (NASDAQ: MSFT) have heated up ahead of Yahoo's Aug. 1 shareholders meeting.

Time Warner shares increased 67 cents to $14.59 on the New York Stock Exchange, while Yahoo was up 95 cents to $22.49, and Microsoft jumped 99 cents to $27.14, both on NASDAQ.

Though a structure of any potential deal is not immediately clear, sources told Reuters earlier that a deal with Yahoo would likely involve merging AOL with Yahoo, with Time Warner taking a minority stake in the combined company.

The sources told Reuters that a deal with Microsoft would likely involve a sale of AOL.

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 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 (NASDAQ: GOOG) 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.

Microsoft's interest in acquiring AOL would serve to bulk up its display advertising business as well as gain more traffic to weaken Yahoo's and Google's position. The software company also needs to convince shareholders it has an Internet strategy independent of its so far unsuccessful pursuit of a Yahoo takeover.

Yahoo rejected the Icahn-Microsoft deal over the weekend and has said it remained open to a full buyout of the company at $33 per share, Microsoft's last offer before walking away.

Microsoft has said it would only strike a deal to buy Yahoo's search business or the entire company if Yahoo's board was replaced.

Since Microsoft walked away from it initial bid to buy Yahoo, Yahoo has separately struck a nonexclusive search advertising deal with Google (NASDAQ: GOOG), which is currently under review by U.S. regulators.

Meanwhile, Time Warner is shopping AOL as part of a strategy to realign its business to focus on content, not distribution. It plans to complete a deal to separate from its Time Warner Cable (NYSE: TWC) by the end of the year.