NEW YORK (FORTUNE) - Investors looking for something that will move Time Warner's intractable stock price, stuck between $16 and $19 a share for two years, should expect to be disappointed -- again.
All fall there has been talk about its AOL unit doing a huge deal with either Microsoft or Google that would value AOL at at least $20 billion -- triple what analysts value it at now. But it's not going to happen. A deal with one of the two will get done and will likely be announced within two weeks. But it will be radically scaled back and likely won't move AOL's valuation needle on Wall Street at all.
What happened? Simple, says one Time Warner executive involved in the deal: The proposals were either too complicated -- in Microsoft's case -- or not valuable enough -- in Google's case. Two Time Warner executives also said that investor Carl Icahn's increasingly public pressure on Time Warner management helped convince dealmakers to lower their sights. They didn't want to be seen as having tried and failed to get any deal at all. Microsoft and Google declined to comment. Time Warner, the parent of AOL and also of FORTUNE and CNN/Money, declined to comment publicly.
With the Microsoft deal, negotiators were trying to figure out a way to in effect merge all of AOL, except the business serving users connecting with dialup modems, into MSN, but it turned out that AOL's dialup and broadband systems and personnel were so comingled as to make that next to impossible. Negotiators were also worried that it was so complicated that regulators would take up to a year to approve it -- an eternity in the fast-moving world of online search and advertising.
What's on the table now, for Microsoft and AOL, is just a merger of their online display and search ad sales forces, with AOL using Microsoft's search engine. Their content businesses stay separate. Google, which was talking to AOL about buying an equity stake, is now just talking about expanding its four-year-old relationship.
Currently, Google supplies search and search related advertising to AOL as a subcontractor. AOL gets about $300 million a year from that arrangement; Google gets about $100 million. AOL wants an even bigger take and more importantly, to get more of its content into Google's search index. Because of AOL's years as a subscription-only service, most of its pages are still hard for search engines to find -- even now that most of the content is free.
Who's going to win? That remains the biggest guessing game in Silicon Valley and on Wall Street. The assumption among many in the Valley has been for some time that Microsoft would ultimately end up on top. Perhaps this is because after a generation, Valleyites are used to losing to Microsoft when it wants a deal as badly as it wants this one.
Microsoft increasingly has seen Google as a threat not only to its MSN division but to its dominance as the world's most important software company. But its effort to build its own search and search advertising engine has had trouble getting traction. Being the search engine for AOL would give it instant legitimacy -- akin to when it supplanted Netscape as AOL's Internet browser nearly a decade ago.
But those who know Google founders Larry Page and Sergey Brin say they are astute and aggressive dealmakers. Just ask Yahoo, which thought it had a deal to be the search and advertising engine for AOL Europe last fall, only to have Brin and Page -- on their way to Spain -- reroute their jet to London to make an 11th-hour winning bid. Indeed, one Time Warner executive cautioned Tuesday that reports showing Microsoft with the edge were "premature."
So which is the better deal? It depends on how much one values simplicity. If AOL goes with Google, on the surface it looks like they get less -- but the chance for slip-ups seem smaller too, says Safa Rashtchy, an analyst at Piper Jaffray in Silicon Valley. The parties are used to working together. There's just the straightforward technical challenge of getting Google's crawler to see AOL's pages and a slight tweak to an existing revenue share agreement.
With Microsoft, AOL has the potential of building a truly competitive ad network with access to what will likely be the biggest online audience for both search and display advertising in the world. With about 420 million unique users, Yahoo is only slightly ahead of MSN with 400 million. AOL adds roughly 160 million uniques. But the risks are much higher too.
Microsoft's search engine is clearly ready for prime time, but the technology that matches search results with advertising is still only in the testing phase. "Microsoft is in the midst of repositioning MSN and they are going to get a property (AOL) that is also in the midst of repositioning? Having to fix both at the same time is going to be a challenge," Rashtchy says.
Whoever wins, it's clear that after months of waiting, the biggest salvo in what has become a true high tech grudge match is about to be fired.