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The widely leaked alliance between Google and American Online has been confirmed with the two companies announcing a broad partnership on Tuesday.

As leaked, Google takes a 5 per cent stake in AOL, a subsidiary of Time Warner, in exchange for a $1bn investment. In addition, Google gains access to more of AOL's content and will ensure that users of Google's instant messaging software can communicate with AIM users. The two companies also plan to collaborate on an online video service.

The deal has been billed as "a global online advertising partnership." And it doesn't get much sexier than that.

"AOL is one of Google's longest-standing partners, and we are thrilled to strengthen and expand our relationship," said Google CEO Eric Schmidt. "Today's agreement leverages technologies from both companies to connect Google users worldwide to a wealth of new content. We've also created a simple way for AOL Marketplace advertisers to buy and place search-related advertising across the AOL network."

The voice of dissident Time Warner shareholder Carl Icahn apparently did little to block the union. Icahn, who speaks for a group of investors with a 3 per cent stake in Time Warner, said the tie-up could prove disastrous "if this agreement would make it more difficult in any way or effectively preclude a merger or other type of transaction with companies such as IAC/InterActive, eBay, Yahoo!, or Microsoft etc. etc..."

Rumors have circulated saying that Microsoft was bidding hard to pair with AOL only to be bested by Google.

AOL will now be able to sell ads on Google's own web sites and sites that display Google ads. In addition, AOL receives a $300m credit from Google to purchase keyword-based spots.

AOL's content will apparently receive prime position in Google searches, but Google denies this will affect the nature of its search algorithm. Translation? Yep, it looks like Google will continue to water down its results, which already suffer from an unhealthy relationship with blog garbage.

"We look forward to working with Google to extend our successful paid-search partnership to other forms of advertising," said Don Logan, chairman of Time Warner's media and communications group. "In addition, we're excited about the potential for driving more traffic to our network of Internet properties. . . . We're confident that this partnership marks the next big step in making AOL an even more important player in online advertising."

The $1bn price for 5 per cent of AOL feels awful high. That would value the AOL business at $20bn.

Anyone else feeling bubbly? ®

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