UPDATE 9-Yahoo seeks AOL tie; Microsoft talks to News Corp

(Adds analyst comment seeing Microsoft as stronger offer)

By Eric Auchard and Anupreeta Das

SAN FRANCISCO/NEW YORK, April 9 (Reuters) - Yahoo Inc (YHOO.O), which was widely believed to be running out of alternatives to accepting Microsoft Corp's (MSFT.O) takeover offer, has become a target of two warring camps of technology giants and their media allies, sources said on Wednesday.

News Corp NWSa.N is considering joining Microsoft in a bid for Yahoo which would bring in News Corp's MySpace online social hangout and create a more formidable rival to Internet juggernaut Google Inc (GOOG.O), newspaper reports said.

But Yahoo, which announced earlier on Wednesday it plans to test Google search ads alongside Yahoo Web search services, is closing in on a deal with Time Warner Inc (TWX.N) with its AOL unit, several sources told Reuters.

The game of musical chairs among the titans of the Internet follows two years of on-again, off-again talks to strike industry-reshaping mergers among different configurations of the same players.

Google, unaccustomed to being backfooted by its rivals, is considered a secondary player unlikely to enter the merger bidding as its growing dominance in Web search and search-based advertising could be blocked by competition regulators.

Reports were sketchy on exactly how a Microsoft deal with News Corp might be structured, making it difficult for Wall Street analysts to say which combination might prove the superior offer. Several said Yahoo has regained some of the negotiating momentum it appeared to have lost with Microsoft.

But UBS analyst Benjamin Schachter said neither an AOL deal nor a reported plan by Yahoo to buy back a chunk of its shares had enough funding to satisfy shareholders clamoring for a deal worth at least Microsoft's current offer of $31 a share.

"I still think Microsoft holds the cards and the cash," Schachter said.

Yahoo's talks with Time Warner are getting near to a deal that would fold AOL's business, excluding its legacy dial-up Internet access operations, into a combined Yahoo company, a person familiar with the talks said. Such a deal would value AOL at $10 billion, the person said.

Yahoo would receive cash from Time Warner in exchange for 20 percent of a combined Yahoo-AOL, the source said. Other sources confirmed the outlines of the talks but provided no further details.

The Wall Street Journal cited sources saying Yahoo would use the Time Warner cash and other funds to buy back several billion dollars worth of Yahoo stock at a price somewhere in the middle of the range between $30 and $40 a share.

The New York Times reported that Microsoft had begun talks to bring News Corp in on its effort to acquire Yahoo.

This combination would bring together three of the biggest Web site publishers on the Internet: Yahoo, Microsoft's MSN and News Corp's MySpace, creating a formidable counterweight to Web pacesetter Google, but also drawing antitrust scrutiny.

"The whole situation seems to be very unstable," said Sanford C. Bernstein analyst Jeffrey Lindsay, adding that Microsoft's bid for Yahoo precipitated a cascade of offers.