Why Talk of an AOL-Yahoo Merger Is Overblown

It's too complex and has too many obstacles

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The Wall Street Journal roused more excitement over a potential merger/buyout between AOL and Yahoo today. According to the Journal, AOL "has hired financial advisers to explore various strategic options for the company, one of which includes a possible tie-up with bigger rival Yahoo." Could AOL pull off such a deal? Here are some reasons to be skeptical:.

  • AOL Hasn't Even Talked to Yahoo Yet, writes Edward Berridge at The Inquirer:

The options being looked at reportedly include merging Yahoo's and AOL's online businesses and spinning off Yahoo's Asian assets to give shareholders back some capital. Another idea would have private equity buy a stake in the combined operations and give a dividend to Yahoo shareholders... What is strange is that AOL has so far not had a word to Yahoo about it yet, so it is a bit like booking a church for a wedding without popping the question.

  • Only Would Cause More Problems for the Companies, writes Kara Swisher at All Things Digital:
It is the complexity of any of those deals that has put a lot of the takeover, buyout, merger and other scenarios that center around Yahoo–with a side of AOL, as well as News Corp., Microsoft, Yahoo Japan, the Alibaba Group–on ice.

Among the issues being grappled with: Onerous tax implications around a variety of deals; a need for complete cooperation from too many players; and the realization that a hookup of AOL and Yahoo might cause more problems than it solves.

“It looks great conceptually and everyone gets all hot and bothered,” said one prominent investor who did his own strategizing about Yahoo and AOL. “But when you actually do the numbers, you hit a pretty big wall of impossible.”

Most analysts have put the odds of any deal for Yahoo as low, in part because it would likely take more than $30 billion to buy the company outright, an amount that might not be available.
  • Too Many Anti-Trust Problems, writes Scott Cleland at The Precursor. He makes a seven-pronged case for why the government wouldn't let this merger/acquisition happen. Here are two of his arguments:
First, AOL is financially-dependent on Google; Google is Yahoo's biggest and most stable long-term client feeding AOL with about a fifth of its revenues -- via a recently signed 5-year agreement for Google to continue to be AOL's search monetization engine. This deal was negotiated by AOL's CEO, a former longtime senior executive at Google. Simply in antitrust terms, AOL can be viewed as a satellite of Google, because AOL has hitched its financial/business/growth wagon to Google Search, Google Mobile/Android and potentially Google Places.

Second, in 2008 the DOJ threatened a Section 1 & 2 Sherman Antitrust case against Google for trying to monopolize via the Google-Yahoo Ad Agreement. The DOJ was concerned that Google had broken up the effort by Microsoft and Yahoo to create a stronger competitor to Google and that the Ad Agreement would make Yahoo financially-dependent on Google. At the time, Microsoft and Yahoo were the only top search generators that were not part of the Google search Keiretsu.

  • ...Though It Would Be Great for Both Companies, writes Henry Blodget at Business Insider:

The two struggling Internet giants of the 1990s, Yahoo and AOL, should merge. Immediately... Yahoo and AOL are both basically media companies. They both use technology extensively, but their core competency is producing content to attract an audience and then selling display ads against that audience. They also both operate duplicative mail, instant-messaging, sports, finance, news, maps, and other services, all of which currently compete with each other. That is senseless.  By combining, Yahoo and AOL would achieve greater scale and reduce duplication.
This article is from the archive of our partner The Wire.