NEW YORK (Bloomberg) — Yahoo! Inc., owner of the second most popular Internet search engine, is socking away cash for potential acquisitions, fuelling speculation that an agreement to buy Time Warner Inc.'s AOL unit is close.

The company is conserving cash "to allow us to do some of the things we may be looking at," chief financial officer Blake Jorgensen said yesterday. The company has discussed a transaction with Time Warner since April, and the latest remarks signal that a deal may be imminent, said Colin Gillis, an analyst at Canaccord Adams Inc. in New York.

A merger with AOL would boost Yahoo's share of the online advertising market, helping it pull closer to leader Google Inc. and widen its advantage over former suitor Microsoft Corp. Still, AOL focuses on display ads, such as web banners, which are less lucrative than search-engine links.

"If you layered in AOL, it would give you a tremendous lock on the display market," said Gillis, who has a hold rating on Yahoo shares. "But do you really want to bulk up in that particular area?"

In an interview, Jorgensen declined to comment on AOL. Keith Cocozza, a Time Warner spokesman, didn't return a phone message.

Yahoo, which reported a 64 percent drop in profit last quarter, also announced plans to cut at least ten percent of its workforce, part of a bid to save $400 million a year. The move would eliminate at least 1,500 workers.

U.S. spending on display ads may climb 17 percent to $8.3 billion this year, down from 33 percent growth in 2007, according to a Barclays Capital report this month. Revenue from the ads on Yahoo-owned sites grew three percent last quarter to $435 million, down from 21 percent growth a year earlier.

Yahoo, based in Sunnyvale, California, cited slowing sales of display advertising yesterday as it cut its annual sales forecast to between $7.18 billion and $7.38 billion, from an earlier prediction of at least $7.35 billion.

Third-quarter net income fell to $54.3 million, or 4 cents a share, from $151.3 million, or 11 cents, a year earlier, Yahoo said. Excluding fees passed on to partner sites, sales rose 3 percent to $1.33 billion.