Yahoo, AOL discuss merger, Yahoo & Google quit deal?

Yahoo has been in more relationships over the past year than a character on Gossip Girl. After CEO Jerry Yang held off Steve Ballmer and Microsoft's unsolicited takeover bid (a bid which now seems downright generous: YHOO is trading at , a far cry from the $32 that Microsoft was offering) Yahoo entered a much-touted partnership with Google to sell that company's more-profitable search ads against Yahoo search queries.

That deal has faced significant hurdles from the Department of Justice over antitrust concerns. So far, the two companies have failed to reach an agreement which would satisfy regulators. Now the companies could be , perhaps as soon as next week. The deal was much touted by Yahoo execs as a way to significantly increase Yahoo cash flow and was used as a stick to fend off Microsoft's advances earlier this year.

What's spurning the breakup, other than a failure to get a sign-off from DoJ? Yahoo has a new potential mate: AOL. Execs at the two companies are to determine how much money a YahAOL combination could save and how much they could potentially make together. A Reuters source said that Yahoo and AOL had engaged in "meaningful" due diligence for several weeks and were focusing on integrating AOL's content and advertising business into Yahoo.

In September, I suggested Yahoo start as a way to beef up its content offerings and tap into its massive reader base. I suspect Yahoo could send huge amounts of traffic to AOL's Weblogs, Inc. unit. AOL owns a ton of assets but has been unable to get a coherent strategy together to make it all work. A former AOL executive that the logistics of the merger would "likely" deal with "how to fold AOL's advertising network into Yahoo's operations, choosing whether to keep separate portals and email services, and squeezing out cost savings by reducing duplication."

There is no guarantee that a Yahoo/AOL combination would fare any better, especially considering the disastrous decisions the exec team at Yahoo has made over the past year -- but at this point, with the stock where it is, Yahoo must do something. With Time Warner anxious to jettison AOL and get something back for it, this could be a beneficial deal for all sides. Or it could completely implode... just like a relationship on Gossip Girl.