Icahn seeks to derail Google as AOL partner

If Internet unit America Online agrees to an exclusive deal with search giant Google, its shareholders will hold the board responsible, Icahn warned.

Carl Icahn

Time Warner and Google have secretly reached a tentative agreement whereby Google would pay $1 billion for a 5 percent stake in AOL, giving AOL a valuation of $20 billion, a source familiar with the negotiations who asked not to be named confirmed Monday. Official word on the deal was expected to come Tuesday, the source said.

The deal with Google, whose stock closed at $424.60, would nudge Microsoft out of the way. Microsoft had been wooing Time Warner to get AOL's search business for many months and was on the verge of a deal before the surprise turn late last week, according to another person familiar with the negotiations who asked to remain anonymous.

Icahn, who directly and indirectly controls 3 percent of Time Warner shares, has been organizing a proxy battle for control of the company and wants to split AOL off.

"Like all shareholders, I am not opposed to Time Warner entering into an AOL transaction that creates long-term value. However, I am deeply concerned that the Time Warner board may be on the verge of making a disastrous decision concerning an agreement with Google if this agreement would make it more difficult in any way or effectively preclude a merger or other type of transaction with companies such as (InterActiveCorp), eBay, Yahoo or Microsoft," Icahn wrote in an open letter to the Time Warner board of directors.

He cited a recent Goldman Sachs report that said eBay and InterActiveCorp would be the best partners to provide incremental benefits to AOL and that Microsoft's MSN and Google would be the worst.

"On the eve of a proxy contest, I believe it would be a blatant breach of fiduciary duty to enter into an agreement with Google that would either foreclose the possibility of entering into a transaction that would be more beneficial for Time Warner shareholders or make such a transaction more difficult to achieve," Icahn wrote. "The real risk for Time Warner shareholders is that a Google joint venture may be short-sighted in nature and may preclude any consideration of a broader set of alternatives that would better maximize value and ensure a bright future for AOL."

"There is really nothing new here, and given that, we are not going to comment," said Time Warner spokeswoman Kathy McKiernan. Google representatives did not return calls or e-mails seeking comment.

The deal would allow Google to retain its biggest customer, AOL, without having to pay too much of a premium.

"Clearly, it is in Google's best interest to hold onto its largest customer; on a gross basis, we believe AOL accounts for approximately $600 million of '05 revenues, or 10 percent of the total, and on a net basis, it is probably closer to $120 million, assuming an average 80 percent traffic acquisition cost rate," Merrill Lynch analyst Lauren Rich Fine wrote in a research report.

Google "appears to have secured AOL vs. a competing offer from Microsoft--maintaining part of its scale advantage in the sector--and the new partnership may give (Google) greater inroads into display advertising," Citigroup analyst Mark Mahaney wrote in a research note. Google's "dependence on AOL is limited--2 percent or less of its net revenue--we believe the reported deal would be a modest positive for Google."

Under the tentative deal, AOL would be able to sell additional ads for its search engine, also powered by Google, on top of ads provided by Google. In turn, Google could promote AOL Web sites among sponsored links in search results, the original source familiar with the negotiations said.