Word of a potential three-way deal involving a takeover by America Online Inc. of Netscape Communications Corp. -- and a partnership with Sun Microsystems Inc. thrown in for good measure -- sparked one of the biggest buying frenzies on the stock market this year, as the Dow gained a whopping 214 points and the tech-heavy Nasdaq soared more than 49 points yesterday. But even in the absence of any official guidance from the three companies -- other than a PR release confirming they were in talks -- investors made up their minds that a deal was indeed going to become real. In its broad outline, here's how the merger is expected to work:

• The arrangement involves a stock-for-stock, pooling-of-interests transaction worth about $3.8 billion in which shareholders of Netscape would receive 0.45 shares of AOL for each of their shares.
• Under the proposed arrangement, Sun would distribute the Netscape software that runs and manages the server computers that power Web sites.
• Three big "ifs," to be sure, but the impact of a looming deal cannot be overstated: Not only would it constitute a pre-emptive strike against Microsoft Corp., but it would further tip the balance of power among Internet portal players to the detriment of second-tier Web wannabes.

Even as federal government prosecutors continue to press their antitrust case against Microsoft for using its existing software business to create an advantage on the Internet, a combination of AOL and Netscape would create a single entity capable of wielding enormous power over the online world. What's more, an agreement would tie three companies with a common interest in keeping Microsoft at bay -- especially as electronic commerce becomes increasingly important. Microsoft recently rejigged its MSN online service as a pure Web play. There's strength in numbers, and an AOL-Netscape alliance will have a better chance of successfully handling any challenge from Redmond. The alliance would also create prodigious cross-marketing opportunities. While Microsoft must be careful about how it cross-promotes its services to keep from running afoul of government antitrust regulations, AOL could use its market position to drive traffic to a single Web portal destination. And what of Sun's role? As Monday came to a close, the different sides had still failed to agree on what part Sun would play. A prominent Wall Street insider told institutional investors earlier Monday that Sun's sales force would sell Netscape's enterprise software, paying a guaranteed revenue stream back to AOL for the privilege. Netscape's enterprise software group still would be part of AOL. Wall Street analysts' estimates generally call for Netscape's enterprise software business to bring in between $700m (£426m) and $750m (£457m) in revenue in 1999. But it remained unclear how rapidly the sides could narrow apparent differences between the amount Sun was willing to pay and the cost of running the enterprise business. The Wall Street source cautioned that a shortfall would produce a "meaningful risk, given how troubled Netscape's enterprise software business is and who they're competing against." If Sun were to take over the management and sales of Netscape's server software business, the deal would immediately thrust Sun into the emerging market for the technologies to enable e-commerce. Netscape currently has server software and e-commerce applications that enable corporations or Internet service providers to provide e-commerce offerings for their customers, as well as to create business-to-business networks. But running such a business could prove to be troublesome for Sun, since it could thrust it into competition against some of its current partners who build similar software that run on Sun's Unix systems. At the same time, however, a Netscape deal could also substantially help Sun. An AOL-Netscape partnership would provide Sun with a partner to help it deliver Java on the desktop -- an area where it has stalled of late -- via AOL's client software. "In the Solaris group, there has been an ongoing attempt to do e-commerce," said a former Sun official, who requested anonymity. "Sun was always mad that IBM was kicking their butt there." It would be a natural for Sun to license Netscape's CommerceXpert products, said the former official. Sun also would be quite interested in Netscape's Internet Messaging products -- which include messaging, calendar and collaboration servers -- the official added, "as there has been a lot of co-operation and competition between Netscape and Sun, with Sun's Internet Mail Server product." Sun also could benefit from integrating Netscape's back-end servers with Sun's EmbeddedJava and PersonalJava implementations. Sun has stated its intent to embed Java in every device, from smart cards to phones to gas pumps. A light version of Netscape's Navigator browser could be a natural front end in these kind of distributed scenarios. Resellers of computer hardware and software, for their part, seemed unsure what to think about a potential AOL-Netscape-Sun collaboration. Netscape's push to sell itself as a portal has left a number of resellers scratching their heads. "This is all brand-new stuff, new business dynamics," said one reseller who offers both Sun and Netscape products. "There are questions about Netscape's intended use of the channel. What are portals offering -- ad links or subscriptions? There are no business models for doing this." Added Mike Mogavero, vice president of consulting with Data Systems West, a Los Angeles-based integrator: "An AOL-Netscape merger would not be a great thing for us. I see it fitting into a small portion of Netscape's business model. ... It's funny that just a week ago, Netscape was lauding their vision on delivering on their Kiva e-commerce products and a week later, they're now talking about becoming an ISP." If AOL successfully brings Netcenter and AOL.com -- two of the biggest sites on the Web -- under control, it would solidify its position as the top online portal. That would also herald a shift in the playing field for the remaining Internet portals. Indeed, analysts who have long expected some kind of shift noted the difficulty of shaking up the current constellation of forces in the portal business through marketing deals. "Acquisition is the only way to do it," says Barry Parr, an analyst with International Data Corp. With more than 14 million fee-paying users, AOL's business is far more lucrative than that of such free, Internet-based services as Yahoo! and Microsoft's MSN.com. But AOL heretofore has lacked a firm presence in the Internet, with the flexibility and reach the Net provides. Experts characterise AOL.com as mainly a stopping-off point for users of AOL's proprietary service.