Following this Yahoo! Inc. [YHOO] affair is like playing a very high-stakes game of Three Card Monte: Take your eyes off the lucky lady and, pfffft, you're cooked. As paidContent reported yesterday and the Wall Street Journal confirmed this morning, Time Warner Inc. [TWX] is talking with the Internet company about shipping AOL and a trunk full of cash to Yahoo! in exchange for a minority stake in the combined company and a chance to close the door on one of the dumbest mergers in recent memory. AOL would get a lifeline. Beyond escaping Microsoft Corp.'s [MSFT] $42 billion headlock, in AOL Yahoo! would get what remains a premier player in Internet advertising and a company that retains large online audiences for financial, entertainment and other content.

The hardest thing to figure here is what's happening on the other side of the deal, where Microsoft is reportedly lining up News Corp. [NWS] for a joint bid for Yahoo!. Under that scenario, Yahoo! would be folded in with Microsoft's MSN portal and News Corp.'s MySpace unit in one mighty online ad-selling, application-bundling, social networking-ing company. That Microsoft CEO Steve Ballmer is thinking of climbing into business with News Corp.'s Rupert Murdoch (pictured) suggests just how worried the software giant is about losing Yahoo!. But Ballmer should think twice. Murdoch has a famously keen instinct for when to buy, sell or hold a business. His interest in unloading MySpace underscores that, with the rise of FaceBook and other social networks, the Web property's best days might be behind it.

"News Corp.'s presence in the transaction perhaps should raise a red flag in terms of the way Microsoft is testing the market," says Adam Lehman, a former senior vice president of business affairs and development at AOL and now head of Rock Ridge Ventures, an investment and advisory firm focused on digital media. "News Corp has a very strong record of getting in and out of the market at the right time. To the extent a deal involves them flipping out of My Space at a significant multiple of what it originally bought it for should raise questions in Redmond."

No doubt. Microsoft's move to ally with News Corp. would make a deal for Yahoo! far more complex and could turn an already challenging integration into a circus. It also betrays surprising insecurity on Ballmer's part for a guy who until recently appeared to be holding all the cards. -- Alain Sherter

See April 9 post on Yahoo-AOL from paidContent
See April 10 story the deal from Tech Confidential
See April 10 post on Yahoo-AOL from Silicon Alley Insider
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