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AOL rides high on rumor mill

Shares of America Online jump amid a surge in Internet stocks and reports that the online giant has been in talks to acquire CBS.

Shares of America Online jumped today amid a surge in Internet stocks and reports that the online giant has been in talks to acquire CBS.

AOL closed at 166.94, up 16.94 points or 11.29 percent.

Speculation over the rumored acquisition increased today following a report in the San Jose Mercury News that said the company had been in talks to acquire CBS over the past year. The report added that while an outright acquisition is unlikely, the companies are expecting to tighten their growing cross-promotional relationship.

AOL completed its acquisition of Netscape Communications last month.

Analysts maintained that the rumor was not the primary driver behind AOL's rise today. Instead, the rise was mainly fueled by an overall robust day of trading in the Internet sector.

Shares of Yahoo, which like AOL is considered an Internet blue chip, shot up close to 40 points today to close at 219.13 on optimism over its recent acquisition of Broadcast.com.

"With the outlook for stable interest rates, with the overall market trading well today, and AOL as an S&P 500 stock, it would make sense for people to acquire more AOL [shares]," said Daniel King, equity analyst at LaSalle Street Securities.

CBS too far removed?
Should an acquisition go through, it would be an extension of an existing relationship between AOL and CBS. Over the past six months, the companies have deepened their cross-promotional relationship.

In September 1998, CBS agreed to advertise its fall television programming throughout AOL's proprietary service, and temporarily on an automatic sign out screen.

In January, CBS became AOL's exclusive provider of news, replacing ABC News, which had enjoyed a deal with AOL since 1995.

Analysts noted that rumors about AOL acquiring CBS are neither new nor surprising. However, some say the prospect of an acquisition remains far-fetched, because television and radio programming are too far out of AOL's experience base and it may not want to venture there.

"I think AOL wants to be in media in a big way, but I don't think this is the way to do it," said Abhishek Gami, an equity analyst William Blair.

Gami added that AOL would be hesitant to put so much of its resources into a business centered around content.

"A hit show makes CBS's quarter or year," said Gami. "AOL's not a hit-driven company. They don't want to get dependent on one piece of business."

CBS, on the other hand, remains in search of substantial Internet play. In February, CBS chairman Mel Karmazin reportedly said the company was considering spinning off its Web assets into a public company. The new company might be called CBS.com.

CBS already owns a 38 percent stake in MarketWatch and a 12.5 percent stake in SportsLine USA.

In related news, AOL said today it would acquire online calendaring service When.com for an undisclosed amount of stock. AOL will incorporate the service across a number of its properties, including its proprietary online service, CompuServe, and ICQ.