July 17 (Bloomberg) -- Time Warner Inc. may struggle to clinch an agreement to sell AOL to Microsoft Corp. by Aug. 1, when the world's biggest software company's fight to acquire Yahoo! Inc. comes to a head.

Microsoft is more interested in getting Yahoo's search business so it can compete more effectively against Google Inc., said Jay Welles, an analyst at Manning & Napier Advisors Inc. At Yahoo's shareholder meeting next month, investors will be able to vote for a slate of directors proposed by billionaire investor Carl Icahn, who favors a deal with Microsoft.

``The likelihood of any sort of deal before the shareholder meeting is fairly low,'' Welles said. Fairport, New York-based Manning & Napier has $17 billion under management, including shares of Microsoft, Google and Time Warner. ``There's still so much to be ironed out.''

Microsoft had plans to meet with AOL executives yesterday to discuss a possible combination, the Wall Street Journal reported, citing people familiar with the situation. Yahoo Chief Executive Officer Jerry Yang rejected a breakup proposal from Icahn and Microsoft over the weekend, saying it would be ``ludicrous'' to sell the search business to Microsoft and leave the rest of the company in Icahn's hands.

Time Warner spokesman Keith Cocozza and Microsoft's Frank Shaw declined to comment. Yahoo spokeswoman Tracy Schmaler didn't return calls seeking comment.

Exploring Options

New York-based Time Warner is taking ``every opportunity'' to explore options for AOL, said Chris Marangi, a fund manager at Gamco Investors Inc. Profit at AOL, which has shifted from selling dial-up Internet service to offering free Web content, dropped 74 percent in the first quarter. A 1 percent increase in advertising sales failed to make up for shrinking subscribers.

``Time Warner would like to do something and take advantage of the turmoil, the unsettled situation,'' said Marangi, who is based in Rye, New York. Gamco held more than 11 million shares of Time Warner and more than 2 million Yahoo shares as of March 31. ``It could fit the bill for Microsoft and for Yahoo. As far as timing goes, I wouldn't put an artificial deadline on any timing.''

Time Warner, down 11 percent this year, closed unchanged at $14.65 at 4:15 p.m. in New York Stock Exchange composite trading. Redmond, Washington-based Microsoft climbed 26 cents to $27.52 in Nasdaq Stock Market trading, while shares of Sunnyvale, California-based Yahoo fell 4 cents to $22.44.

Brinksmanship

``If there is a potential bona fide deal, then due diligence would take a while,'' said Brent Williams, an analyst at Benchmark Co. in New York. He has a hold rating on Microsoft shares and doesn't own them. ``If this is just a case of investment banking brinksmanship, then they will milk this up until the last second for maximum effect, so probably that's after the meeting or even longer.''

Rob Enderle, president of the research firm Enderle Group in San Jose, California, said it makes sense for AOL to try to lock in a deal with Microsoft before the investor vote. He doesn't own shares of Yahoo, Microsoft or Time Warner.

``Discussions with Carl Icahn and Yahoo probably made the Time Warner folks aware of the fact that Microsoft might once again make a play for Yahoo,'' Enderle said. ``The Yahoo deal could cost Microsoft enough that they wouldn't want to do another acquisition for some time.''

To contact the reporters on this story: Gillian Wee in New York at gwee3@bloomberg.net; Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: July 17, 2008 16:22 EDT