The Wall Street Journal runs a report saying that AOL is discussing a Yahoo merger with Private-Equity firms. The discussion are still preliminary and might not lead to anything as the merger of AOL and Yahoo is a complicated undertaking.
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The report was enough though, to give Yahoo shares a 13% boost in after hour trading. Whether or not AOL and Yahoo together can take on Google and Microsoft is questionable. In 2008 Microsoft wanted to buy Yahoo. It was a turbulent affair with no result, besides that now in 2010 Yahoo Search has been taken over by Bing.
More details on The Wall Street Journal.