I'm not the type to dismiss rumor-mill chatter without conducting some due diligence of my own. Still, it didn't take long for me to laugh off yesterday's Silicon Alley Insider report, claiming that private equity firms were in talks to unite AOL (NYSE: AOL ) with Yahoo! (Nasdaq: YHOO ) -- and then take the combined company private.
According to a "plugged-in source," the plan is to have AOL CEO Tim Armstrong run the combined company after private-equity firms combine the two former tech titans into one.
Don't get me wrong. I think a combination of AOL and Yahoo! makes sense. Both companies have been dot-com laggards. Armstrong, who cut his teeth as a key Google (Nasdaq: GOOG ) executive before taking on the challenge of an AOL turnaround, would probably make a better fit than Yahoo!'s Carol Bartz at the helm. However, I don't see such a deal happening for several different reasons.
- For starters, you need both companies and their shareholders to agree on the exit strategy. Both companies have been disappointments in recent years, but buyouts will require juicy premiums. It would be heresy for Yahoo! to punch out at a much lower price point than what Microsoft (Nasdaq: MSFT ) offered two years ago. AOL is only trading marginally lower than where it was when Time Warner (NYSE: TWX ) decided to spin it off late last year, but it, too, would require a healthy markup.
- Yahoo!'s market cap is roughly eight times greater than AOL's valuation. How would you convince Bartz and everyone at Yahoo! to cede power to the leadership of a far smaller company?
- Consolidation is a major part of Web portals' growth strategy these days. A combined Yahoo! and AOL would have plenty of money at its disposal, especially if Yahoo! unloads its Asian investments, but sometimes you need the equity kicker to seal the deal. There are compelling properties -- including IAC's (Nasdaq: IACI ) Ask.com -- out there to be had. Taking AOLhoo! or YahAOL private would make it harder to go shopping.
Go ahead and shack up, Yahoo! and AOL. But please do it in public, so that investors can have a say -- and a play -- in your ultimate direction.
Do you think AOL and Yahoo! would make a good merger? Post your thoughts in the comment box below.