Yahoo is unlikely to get into a bidding war over AOL with Microsoft because if Microsoft gets in the way, Yahoo could instead renew talks over News Corp's Web properties, a person with knowledge of the plans said Thursday.
Meanwhile, the beseiged search firm received an important boost from its second largest shareholder.
Yahoo , seeking to shape an independent growth strategy after rebuffing Microsoft's bid to take it over, has kept in contact with News Corp , the source said, but discussions with Time Warner about AOL appeared further along.
News Corp chief Rupert Murdoch said just last week that a deal between his company -- which owns the popular MySpace online social network -- and Yahoo was "very unlikely."
Yahoo and Time Warner have been discussing the terms of a potential deal in which Yahoo would merge its operations with AOL, and Time Warner would take a minority stake in the combined company, sources have said.
Microsoft has also been discussing a potential AOL deal with Time Warner, another source said earlier this week.
Any deal between Yahoo and AOL was unlikely to happen before Yahoo's Aug. 1 annual shareholders meeting, the first source said.
Such a deal would be one part of Yahoo's plans to grow as an independent company -- plans that include a previously announced search ad tie-up with Google Inc and a potential sale of Yahoo's Asian assets, the source said.
Yahoo said in a public filing Thursday it was seeking ways to "unlock the value of our Asian assets" -- holdings primarily in Japan and China worth around $9 per Yahoo share.
Yahoo is also sharing various pieces of its alternative strategy with shareholders ahead of Aug. 1, as it tries to convince them the company can survive without ceding control to Microsoft, two people familiar with the matter said.
Shareholders will have to decide on Aug. 1 whether they want to retain Yahoo's current board or vote in a rival slate nominated by billionaire investor Carl Icahn, who owns nearly 5 percent of the company.
Robert Hagstrom, a portfolio manager at Legg Mason, Yahoo's second-largest institutional shareholder, told Reuters last week his firm prefers a full acquisition of Yahoo by Microsoft for $33 a share.
Other shareholders, too, have said they prefer a full acquisition rather than a partial deal that breaks up the Internet company.
Microsoft and Icahn recently teamed up to propose a deal that would involve Yahoo selling its search business to the software company, and handing over the remainder to Icahn.
The Microsoft-Icahn proposal is a sweetened version of a partial deal Microsoft had earlier offered Yahoo, after withdrawing its $47.5 billion offer to buy the whole company.
Yahoo has said it is willing to sell itself to Microsoft for $33 a share, but Microsoft said it is no longer interested in a full acquisition.
Shares of Yahoo edged down 4 cents to close at $22.44 on the Nasdaq on Thursday, while Microsoft shares rose 26 cents, or nearly 1 percent, to close at $27.52.
Officials from Yahoo, Time Warner and News Corp were not immediately available or declined to comment.
Legg Mason Backs Management
Yahoo Inc's second largest institutional shareholder Legg Mason Capital Management said on Friday it will back Yahoo's board, dealing a blow to a billionaire investor Carl Icahn's efforts to get a rival board slate elected.
Legg, which disclosed it owns 60.7 million shares of Yahoo, or 4.4 percent of outstanding shares, urged Yahoo and Icahn to settle their differences ahead of Yahoo's August 1 shareholders meeting.
The firm's portfolio manager Bill Miller told Reuters last week Icahn would have more support if he promised not to sell Yahoo below $33 per share.
He also urged Microsoft Corp to make its offer public.
"If Microsoft wants to acquire Yahoo, it can make the terms and conditions of its offer public," Legg said in a statement.
"If Yahoo shareholders support it, I am confident the board of Yahoo will accept it." Legg backed Yahoo's actions since Microsoft made its $47.5 billion offer to buy Yahoo public earlier this year.
"We believe the current board acted with care and diligence when evaluating Microsoft's offers," Legg Mason said in a statement.
"We believe the board is independent and focused on value creation for long-term shareholders."