NEW YORK (Reuters) - AOL Inc has tapped Bank of America to explore strategic options including a potential Yahoo Inc merger, according to people familiar with the matter.
Allen & Co LLC, a New York-based boutique investment bank that focuses on media and entertainment, is also advising AOL on its options, said one of the sources.
The idea of combining AOL with Yahoo is still considered in an early stage and may not materialize into a deal, the sources said.
But the Yahoo deal is compelling for AOL Chief Executive Tim Armstrong, who believes he can do a better job running a combined company, the sources said.
"First of all, Yahoo has to be approached and this is nowhere close to that point," said one of the sources.
Yahoo's chief executive, Carol Bartz, regularly speaks with CEOs of other companies, but a source close to the company said that in no way suggests they are in active deal discussions with any of them.
The source said Yahoo is not seeking or fielding proposals.
Getting Yahoo and AOL to merge on a stock deal is challenging, another source said.
Private equity firms including Silver Lake, TPG Capital, Madison Dearborn Partners and KKR have previously approached AOL to explore a buyout of Yahoo but sources said private equity interest has cooled over the past few weeks.
Bank of America declined to comment. Allen & Co was not available for comment.
The current structure being considered for a combination would require Yahoo spinning off its stake in China's Alibaba to its shareholders or allowing Alibaba to buy that back, one of the sources said.
Yahoo Chief Executive Carol Bartz told Reuters in September that Yahoo has turned down offers from Alibaba to buy back its stake. The stake is estimated to be worth up to $11 billion.
Spinning off Alibaba would generate a return of capital to Yahoo's shareholders and potentially unlock value in that business, one source said. In addition, a slimmed-down Yahoo would be more affordable. AOL had $623.3 million in cash and equivalents as of September 30.
"AOL could get the cash from its own reserves, or potentially from private equity," the source said.
Still, it remains uncertain whether Yahoo would consider an offer after turning down, then losing a deal to be acquired by Microsoft.
At least one prominent Yahoo investor, unhappy with the company's lack of direction, has pushed the company to review alternatives, said two sources.
Sources familiar with the plan said they remained skeptical a deal between AOL and Yahoo could be consummated. "My view is that Yahoo, if they ever decide to do something, have much better options than AOL," said one of the sources.
AOL shares closed $1.18 higher, or 4.7 percent, at $26.10 on the New York Stock Exchange.
Reporting by Nadia Damouni; Editing by Gary Hill