What if News Corp., MSN and Yahoo were a separate company?

For the first time since Microsoft announced its intentions to buy Yahoo, I see one way the coupling might make (a tiny bit of) sense.

As of late yesterday (April 9), Yahoo is now rumored to be contemplating a merger with AOL (talk about the ultimate anti-Microsoft poison pill!). And Microsoft is said to be talking to News Corp. about going in together on the Yahoo acquisition bid. My ZDNet blogging colleague Larry Dignan has all the latest gory details in the tit-for-tat Microsoft-Yahoo saga.

Of all these leaks and rumors, the one that's most intriguing to me is the possible Microsoft-News Corp. tie-up. What if the pair does manage to buy Yahoo -- and then decides to create some kind of independent subsidiary that would combine the assets of Yahoo, MSN and MySpace?

It wasn't that long ago that Silicon Alley Insider Henry Blodget was suggesting that a Microsoft-Yahoo partnership might work if the pair spun it off. From Blodgett last May:

"If Microsoft spun out Yahoo-MSN, the company would be able to recruit the best talent, run it's own show, and, if necessary, compete with Microsoft (which it would never be able to do freely as a division--this is the primary reason an outright acquisition would be a disaster). The company could have an exclusive technology deal with Microsoft and get first crack at all partnerships. Most importantly, existing Microsoft and Yahoo shareholders would benefit from all the upside--because they would be the combined company's single largest shareholders."

Some (including Blodget) have argued that Microsoft CEO Steve Ballmer & Co. would never agree to such an arrangement. Just look at how they fought the Department of Justice's suggestion that they cleave Microsoft into a Windows company and an "everything else" company back in the 90s, they doubters claim.

But I'd argue that Microsoft in 2008 might be more amenable to spinning off a subsidiary in the name of maintaining the people and the more entrepreneurial culture. Look what happened last year with Bungie. Sure, the Bungie (Halo) folks had to practically mutiny to get themselves unhitched from Microsoft, but they did it. And a number of teams in the Microsoft Entertainment and Devices division have been acting closer to independent subsidiaries than part of the Redmond juggernaut. (Think Xbox, Zune, Pink, etc.)

Suspending all the regulatory questions for the moment, do you think a Microsoft-Yahoo-MySpace combo would work as an independent subsidiary or separate company, bankrolled by Microsoft and News Corp.?