Time Warner (NYSE: TWX) shareholders have been watching AOL for years -- hoping something could be done to either get this company back to its former glory or to get it out of the way of a company with outstanding entertainment content. Well, that change may finally be afoot.
The New York Post is reporting that Time Warner, a Motley Fool Stock Advisor pick, is in preliminary discussions to sell a stake in AOL to Microsoft (Nasdaq: MSFT). That makes sense since MSN, Microsoft's Web business, could also use bulking up to become more competitive. MSN would surely also benefit from the sheer volume of traffic AOL manages -- particularly as ad-based revenue becomes an increasingly significant realm and the company seeks to expand its presence amid strong competition from Yahoo! (Nasdaq: YHOO) and Google (Nasdaq: GOOG).
All of this could just be window-dressing for Time Warner, although it's unlikely. AOL has certainly been having problems, and it might just be good company PR to fly a trial balloon to see how the press and public would react to drastic changes to AOL's approach and structure. This is important, since AOL has planned significant changes to its portal and may also be considering wider-reaching changes to the operating unit. One positive indication is that Time Warner stock is up 3.3% in late afternoon trading.
As it pertains to the recent press flurry, it bears mentioning that the company has been focusing shareholder attention on the third-quarter relaunch of the publicly available version of the AOL.com portal, with content, features, and tools that were previously only available to AOL's paying subscribers.
The company expects branded advertising, performance-based advertising, and paid search advertising to create new opportunities for AOL and challenge existing portals like Yahoo!. It's not a strategy without risk, however, as it will involve changes to AOL's current operating structure, which may or may not pan out in the company's favor.
Finding a partner to share the burden of risk may be the smartest way to go -- depending on the financial terms. Since there is no deal yet, there are no financial terms to discuss.
But today's excitement will soon be replaced by the realization that Time Warner is expected to compound earnings at the rate of 11% annually for the next five years (slightly faster than the S&P 500) and posts a forward P/E of 20. The stock has been trading sideways for the last two years, and it's my opinion that the company will continue doing so until the degree of uncertainty surrounding its AOL unit receives some resolution.
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