Does an AOL-Yahoo Merger Make Sense?

The pros and cons of a Web portal union

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Though struggling, Yahoo and AOL are still two of the biggest Internet companies in the world. That's why a Wall Street Journal report hinting at the possibility of an AOL-Yahoo merger sparked a flurry of interest on Wall Street. Do the two companies pair well? How likely is a merger?

  • A Merger Could Really Help Them Beat Google, writes Jessica Vascellaro and Anupreeta Das at The Wall Street Journal: "A combined Yahoo-AOL would have greater scale to compete in online advertising against industry juggernaut Google Inc. While both companies draw huge amounts of users, their advertising businesses have struggled as they've faced competition from a range of websites."
  • This Merger Could Be a Godsend, adds Henry Blodget at Business Insider. He gives a number of reasons why:
There is huge and needless duplication of services at AOL and Yahoo: "Portal" page, finance, sports, entertainment, celebrity gossip, games, mail, instant-messaging, ad network, search window (outsourced), chat, etc.  There is no reason for these services to be duplicated. And by splitting the market, Yahoo and AOL are splitting the market and thus losing more ground to their competitors. ...

The combination would be instantly accretive for shareholders. In combining, Yahoo and AOL could not only boost revenues, but cut hundreds of millions of dollars of costs. Both companies are already gushing cash, so the combination would immediately goose cash flow.

The combination will eliminate a major competitor for both companies--both in display advertising and, importantly, in the consolidation of the burgeoning online content industry.  AOL just bought TechCrunch for ~$40 million. Yahoo should also have bought TechCrunch--and we suspect that AOL's move might just wake Yahoo's M&A team up. In future sales, therefore, AOL and Yahoo might be competing with each other for companies like TechCrunch. That will drive prices up...unless they're working together.

  • They Don't Stand a Chance Against Google, writes Ryan Tate at Gawker:
It would be a deal of unprecedented irrelevance. It's not clear how Yahoo, the has-been portal, and AOL, the has-been dial-up service, can ever hope to vanquish Google, which is expanding aggressively and has become a vortex of engineering talent and a juggernaut in online advertising. Both AOL CEO Tim Armstrong and Yahoo CEO Carol Bartz, in contrast, have posted quarter after quarter of disappointing earnings and are comparatively bereft of computer scientists. Sure, Armstrong is just getting going at AOL, and he's a former Google sales honcho, but what's he got up his sleeve? Blogs? He bought Techcrunch, and his own hyperloca
  • It Will Wed Them to the Past Too, observes Erick Schonfeld at Seeking Alpha: "While it might look convincing enough on paper, what Armstrong and Bartz (two aging portal players proposing to prop each other up) really have to ask themselves is this: Do they want to merge with the past, or invent the future? Merging doesn’t help them with social. It doesn’t help them with search. It doesn’t help them with mobile, and it barely helps them with local. It only helps them with one thing: scale. And that may no longer be enough."
  • Tim Armstrong Is Not Ready to Lead Such a Company, writes Jay Yarow at Business Insider:

We have to ask: What exactly has Tim Armstrong done to deserve to lead a combined AOL-Yahoo?

As far as we can tell he's done two things well:

  • He reorganized AOL without killing morale at the company.
  • He has a vision for AOL, and he's trying to execute on it.

Are these two things good enough to put him in charge of a very tricky merger between two mega-web companies?

Hold on a moment. A deal is not happening anytime soon. The trial balloon in the media is coming from a handful of bankers and investors who have tried to gin up interest in a deal for months. And at least a few of the named “suitors” in The Journal’s story, like the Blackstone Group, have already passed on the idea. More importantly, Yahoo first heard about the rumors from the media and its own bankers at Goldman Sachs, according to people close to the company. ...

Making a deal work would require fancy footwork and risk. AOL’s market value is about $2 billion, while Yahoo’s is now about $20 billion — before a premium. The back-of-the-envelope math requires that Yahoo sell its 39 percent stake in Alibaba, one of China’s biggest Internet companies and considered one of the company’s biggest and most desirable assets, which could be worth $12 billion... But Yahoo believes that Alibaba will fetch more in a public spinoff down the road than in a sale now, so why sell now?

This article is from the archive of our partner The Wire.