Yahoo, Time Warner reportedly discuss deal to thwart Microsoft bid

Yahoo and Time Warner have held talks on a deal designed to thwart Microsoft's bid for Yahoo, according to a report in The Wall Street Journal.

Under a possible deal, Yahoo would acquire Time Warner's AOL in exchange for the media conglomerate taking a large minority stake in the combined company, according to unidentified sources familiar with the matter. The companies could save $1 billion a year, the sources said. Talks between the companies held earlier heated up when Yahoo reapproached Time Warner about a proposal to take to its board.

Meanwhile, Yahoo and News Corp. continue to talk as well, discussing a deal under which News Corp. would sell its MySpace.com social network to Yahoo in exchange for a stake in the company, the report said.

Yahoo has rejected Microsoft's acquisition bid, saying it undervalues the company. The $31-a-share price at the time the bid is now worth $28.62 because of a drop in Microsoft's share price.

Microsoft is expected to propose its own candidates for Yahoo's board and has until March 14 to do so, but Yahoo could try to push the deadline back, the sources said. If the deadline doesn't change, Yahoo and Microsoft could hold discussions this weekend and avoid leaks affecting their stock prices, a source said.

Microsoft has recruited Alan Schwartz, chief executive of Bear Stearns, as well as Morgan Stanley and Blackstone Group, to help figure out a winning acquisition strategy.

The sources told the Journal that Microsoft will likely end up purchasing Yahoo, despite the Time Warner and News Corp. talks.