Netco now AOL's search provider

Google and Time Warner confirmed a deal on Tuesday that will see the Silicon Valley darling pay $1 billion for a 5% stake in AOL.

The TW board ratified the deal despite a transit strike that crippled much of Gotham on Tuesday.

Agreement leaves in place what Google wanted: exclusivity as AOL’s search provider. In exchange, AOL will be able to increase advertising throughout Google and will sell ads to clients that make use of Google’s technology as part of what it will call AOL Marketplace.

Collaboration on video searches and instant-messaging is also expected. AOL and Google’s IM systems have not previously been able to work together.

But perhaps the most watched part of the deal will be a clause that allows for AOL content to appear more prominently in Google’s search engine. How Google will integrate that material has both Wall Street and consumers on tenterhooks.

The news follows a Monday letter from TW activist shareholder Carl Icahn, who, despite the astonishing amount of coin, called the agreement potentially “disastrous” if it prevented further AOL pacts.

Time Warner did not immediately return a call for comment, but in a statement TW chief exec Richard Parsons emphasized the deal’s ad-traffic benefits, saying he thought it will “meaningfully strengthen AOL’s position in the fast-growing online advertising business.”

Don Logan, who runs TW’s Media and Communications Group, also stressed the importance of advertising, suggesting that the company sees ad coin as the main way to grow a division that’s been criticized as a dinosaur in an era of Web-based email and niche Web sites.

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