The latest reports across the blogosphere seem to indicate that acquisition talks between Yahoo and AOL are intensifying, and a deal could possibly come as soon as this month. Under the current proposals, it appears that Yahoo would purchase just about all of AOL save for its ISP business.

That portion of the company would likely be sold off to a company such as EarthLink, which back in July expressed interest in such a deal. Yahoo would have no use for the Internet access portion of AOL: it currently has no ISP business and prefers to align itself with other companies to promote its core search and Web services.

A combined company may look very attractive once again to Microsoft, even though it has repeatedly said publicly that it has no longer any interest in Yahoo. In addition to its attempts to merge with Yahoo, the Redmond company as recently as late 2005 attempted to cozy up to AOL and get its then-MSN Search as the default search for its customers. Those plans backfired, and Google took a five percent stake in AOL.

With Yahoo and AOL together, it could make good strategic sense for Microsoft to come to the bargaining table once more. As VentureBeat pointed out last month, all three companies are desperate to do some type of deal, all for different reasons.

AOL parent Time Warner wants to unload the unit because AOL is just not pulling its weight and is a drag on the company overall. Yahoo is desperate for a deal because it looks increasingly likely that it will have serious problems in completing its advertising deal with Google, and the company needs to have a backup plan to prevent the bottom falling out of the stock price if the DOJ rejects the deal.

Finally, Microsoft needs to do something to curb Google’s dominance. A merger could help it to both compete with Google on a more even keel in both search advertising and in search, where it is far behind its rivals.

Is a deal possible, though? Some may see the combination of three Internet giants as impossible. In reality, it wouldn’t be. Even after all the consolidation, the combined company would only control a quarter of Internet ads.

Even if the three were to settle on a unified search platform, that would not matter much either. If you take comScore’s latest data from August, a combined Microsoft-Yahoo-AOL search would account for 32 percent of the market, just over half of Google’s 63 percent share.

And as with any merger, its not likely that the company would be able to hold on to all of its current market share — so its likely that number would be lower if it actually happens.

Either way, its clear Yahoo needs to do something to calm the nerves of its investors. A deal with AOL could do it, but the best result for all parties would be a combination of all three. Some involved (Jerry Yang) will not find this too palatable, but in the end sometimes you have to do something you don’t want to. That’s life.

 
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