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Microsoft Gains in AOL Stakes

Yahoo! folds, giving the software giant a leg up on rival Google.


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links with

Time Warner


may give it an edge in the rapidly shifting battle for America Online, analysts say.

On Thursday, it emerged that



had dropped out of the bidding for a partnership with AOL, citing the high price tag being sought for the Dulles, Va., Internet property. That potentially slims the race for AOL allies to Microsoft and


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, which may be bidding along with media giant


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But some investors believe Google could end up being an also-ran. Microsoft, the world's largest software company, and Time Warner, the world's biggest media company, share a strong emphasis on intellectual property, says Rob Enderle, a principal analyst with Enderle Group in San Jose, Calif. He notes that Microsoft is fighting against the spread of the Linux free operating system, while Time Warner is battling against Internet pirates.

"The marriage between Microsoft and Time Warner makes a lot more sense based on the history of the business than a Google-Time Warner combination," adds Mark Stahlman, an analyst with New York-based Caris & Co. who rates Microsoft and Yahoo! buy and Google above average.

Still, beating Google won't be an easy feat for Redmond, Wash.-based Microsoft. As with all deals, the final issue will come down to price.

Time Warner is looking for a partner for America Online, which continues to hemorrhage dial-up subscribers while boosting advertising revenue. Time Warner is looking to boost its moribund share price, which has prompted complaints from dissident shareholder Carl Icahn.

"I am not sure everything else combined can trump that," Tony Ursillo, an analyst with Loomis Sayles in Boston who follows the software industry, says of the price issue. "It's a financial transaction first and foremost."

AOL's value isn't reflected in Time Warner's share price, says Henry Berghoef, director of research at Chicago-based Harris Associates, which owns shares of Time Warner.

"Given where Time Warner's stock is trading these days, AOL represents a free option on a potentially very interesting value," he said in an interview. "I would like Time Warner to do what creates the greatest value for shareholders."

In part, Microsoft wants to get a piece of America Online to thwart the ambitions of Google, which provides search services for the Time Warner service. The software giant also wants to boost the popularity of its MSN Internet service, which lags Yahoo! and Google in users. Yahoo! has decided against bidding for a stake in AOL, a company spokeswoman says.

In an interview with

The New York Times

, Microsoft Chairman Bill Gates said the company was interested in AOL to take advantage of the surging interest in Internet advertising. A Microsoft spokeswoman declined to comment Thursday.

"We think that it's more important that Microsoft gets this than Google," says Daniel Poole of National City, which owns shares of Google, Microsoft and Yahoo!. "It's a very close battle."

Google, which gets about 11% of its revenue from advertising on AOL, also has the resources to buy AOL to beat back any challenge from Microsoft.

The Mountain View, Calif.-based search giant also has other ambitions, including broadening its reach in the advertising business. That concept may interest it more than acquiring AOL, says Martin Pyykkonen, an analyst with Hoefer & Arnett who has a buy rating on Google and a strong buy rating on Yahoo!. He doesn't follow Microsoft.

"AOL is a great distribution partner for them and they clearly would like to keep them if they could," he said. Google declined to comment.