Google Inc., the most-used Internet search engine, may consider making a bid for America Online to keep the company from switching to Microsoft Corp.'s search technology, a Merrill Lynch & Co. analyst said.
America Online, the world's biggest Internet access provider, may replace Google's search engine with a product from Microsoft, a person familiar with the matter said Thursday. Microsoft also is considering taking a stake in America Online, a unit of Time Warner Inc., the person said.
Google, based in Mountain View, Calif., receives 12 percent of its sales from advertising and other fees generated by America Online. It may make a bid to preserve that income, Merrill's Lauren Rich Fine wrote in a note to clients Friday. Losing AOL as a client would cut Google's earnings per share by 5 percent to 10 percent, she said.
"This would certainly protect Google's revenues from AOL," Fine wrote in the report. She rates Google shares "neutral." A Google-AOL deal also may help Google gain content, she said.
"As a public company, we can't ever comment on rumors about acquisitions or potential investments," Google spokesman Michael Mayzel said. AOL spokesman John Buckley declined to comment. Merrill Lynch spokeswoman Carrie Gray said Fine wasn't available to comment on the report.
Google can fend off Microsoft founder Bill Gates without purchasing AOL, Jeff Matthews, general partner at Ram Partners in Greenwich, Conn., said in an e-mail. Ram Partners manages more than $25 million, including Google shares.
"They are thwarting him every day just by out-innovating" Microsoft, Matthews said. "These guys have bought cool new technology. They have not bought legacy platforms such as AOL just to keep market share."
Google raised $4.18 billion on Sept. 14 in a follow-on stock sale, cash the company may use to make acquisitions and develop new products.
America Online is worth about $15 billion to $20 billion, said Richard Greenfield, a Fulcrum Global Partners analyst in New York. He said many analysts value it at less than $10 billion.
Goldman Sachs Group Inc. analyst Anthony Noto estimates America Online contributed 4 percent to 7 percent of Google's earnings per share in the first half of 2005. New York-based Noto, who rates Google shares "outperform," said in a report Friday that AOL's contribution to Google's profits is declining every quarter.
AOL first started using Google's search technology in May 2002. Under the agreement, AOL displays ads sold by Google and the companies share revenue generated when users click on the ads.
AOL, which has lost 6 million dial-up subscribers since 2002, this year added a free Web site with videos, news and a search engine powered by Google. The new site puts AOL into more direct competition with Yahoo and Microsoft's MSN, which also offer online content and search services.
"They're trying to reinvent themselves," said Marcel Nienhuis, an analyst at Radicati Group Inc., a market researcher in Palo Alto, Calif. "Compared to Google, Yahoo and Microsoft, they have the perception of being a little bit behind."
A Microsoft-AOL combination would bolster both companies' user counts and range of Web content, heightening competition for Google and Yahoo, Fine said.
Google had 80.4 million unique U.S. visitors in August, according to New York-based Nielsen//NetRatings, which tracks Web use. Microsoft's MSN service had 92.1 million, and AOL had 75.7 million. Yahoo had the most visitors with 101.3 million.