Digital content provider AOL, in conjunction with private equity firms, is eyeing to acquire Yahoo! (Nasdaq: YHOO) in a bid to challenge Google's (Nasdaq: GOOG) dominance.

According to a report by WSJ Silver Lake Partners and Blackstone Group LP are among the private equity firms in cahoots with AOL to effect such a formation.

Considering the size of the buy that AOL is attempting, it looks like a case of Jonah swallowing the whale -- AOL is valued at $2 billion, while Yahoo! has a market capitalization of $20 billion.

However, the consortium intends to actualize such a buy by slicing-off key assets from Yahoo!, like its 40 percent stake in Alibaba, which analysts value at $10 billion. Chopping off such assets would make Yahoo! a more affordable bet.

Another scenario could be a reverse-merger whereby Yahoo! could combine operations with AOL, after divesting non-core assets.

Yahoo!'s shares rose 10 percent, responding to the report. AOL and private partners are following a strategy to target Yahoo! shareholders by floating the idea in the market first, prior to directly talking to Yahoo!. Thus it will have the solid case of a positive market verdict to cash in on when it approaches Yahoo!.

AOL is in a transition mode as it makes structural changes to become a quality original content provider. It has been building its team of original content writers -- it recently hired hundreds of writers to develop original content.

Also AOL has been on a buying streak having recently acquired breaking news blog TechCrunch after gobbling up Engadget, Autoblog and Joystiq. The focus has been to generate traffic as advertisement is the core of its business. Thus a merger with Yahoo! will offer both the companies the necessary scale.

Yahoo! has been focusing on increasing its search-based revenue. It has partnered with Microsoft (Nasdaq: MSFT) and its search engine is currently powered by Bing. In a deal signed in 2009 Yahoo! made Microsoft's Bing search engine its exclusive platform. Yahoo! sells advertising space for the online search for both companies and keeps up to 88 percent of the revenue for the first five years, while Microsoft pays Yahoo! for the traffic it generates and will absorb most of the expenses.

Microsoft bid for Yahoo! in 2008, offering $46 billion, but the deal did not materialize. Thus in the present form, AOL will be able to garner Microsoft's support as well.

International Business Times, The Global Business News Leader

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