NEW YORK (Reuters) - Google Inc. and America Online Inc. Tuesday expanded their search and advertising alliance to include video and instant messaging, shutting out Microsoft Corp., which had fought hard for a deal with Time Warner Inc.'s AOL unit.
America Online said Google had agreed to invest $1 billion to take a 5 percent stake in AOL, as part of an enhanced pact where Google will move beyond text-based advertising to allow AOL to sell graphical ads to Google's fast-growing ad network.
The stake effectively values AOL at $20 billion, a key benchmark should Time Warner elect to spinoff or sell a part of its Internet unit in response to dissident shareholder Carl Icahn's proxy campaign to break up the company.
Terms of the deal call for AOL to make more of its Web sites searchable via Google search, including a plans to feature AOL's premium video services within Google Video, a way of searching for Web-based video programming.
They also said they had agreed, under certain unspecified conditions, to allow users of Google's recently introduced instant messaging system Google Talk to communicate with users of AOL's market-leading AIM instant messaging service.
Ahead of the announcement, analysts called the new agreement a major defensive win for Web search leader Google, depriving Microsoft (Research) of a major customer that would have jump-started its push to compete with Google in the online ad services market.
In a letter to Time Warner's board of directors released Monday, billionaire investor Icahn labeled the potential AOL-Google deal as "disastrous" because it may rule out potential future deals AOL might do with Google rivals such as eBay Inc. (Research) or Microsoft.
Shares of Google (Research) edged lower in after-hours trade on the Nasdaq Tuesday after closing at $429.74. Time Warner (Research) shares edged higher after the bell after closing over 1 percent higher at $17.74 on the New York Stock Exchange.
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