Whatever in World Wide Web

Yahoo Inc. and Time Warner Inc.’s AOL are closing in on a deal to combine their Internet operations, a move aimed at thwarting Microsoft Corp.’s effort to acquire Yahoo, people familiar with the matter said Wednesday.

But Microsoft is recrafting its assault plan by talking with Rupert Murdoch’s News Corp., publisher of The Wall Street Journal, about mounting a joint bid for Yahoo, people familiar with the matter said. Microsoft and News Corp. have yet to reach an agreement on joining forces but one person apprised of the plan described the discussions as serious. Such a deal would combine three of the biggest Internet properties: News Corp.’s MySpace, Microsoft’s MSN and Yahoo.

Negotiating Leverage

The AOL-Yahoo deal under consideration would include the repurchase of some Yahoo shares at a price above Microsoft’s offer. Taken together with a possible search advertising pact with Google Inc., the plan could give Yahoo an alternative to a Microsoft takeover — although many analysts and investors believe Microsoft will ultimately win out. At the least, Yahoo’s efforts could give it more leverage to negotiate a higher price from Microsoft.

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