AOL & Yahoo! Merger?

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.

Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz wonders if AOL will ever party like it's 1999. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it's got mail.


Read/Post Comments (6) | Recommend This Article (15)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2010, at 3:35 PM, Melaschasm wrote:

    I would rather see AOL and Yahoo either work together on some projects, or trade parts of their business to allow each to become more focused.

    One buying the other would leave two old brand names, and only moderate reductions in administrative costs.

  • Report this Comment On October 05, 2010, at 7:16 PM, plange01 wrote:

    no merger for these two beautys but a dual bankruptcy would be in order!

  • Report this Comment On January 11, 2011, at 11:55 AM, shylohjacobs wrote:

    I find yahoo much more useful than AOL. The other day I was looking for bmw repair services and yahoo brought up exactly what I needed. I always struggle with AOL. So a merging, would probably make things harder for me. http://www.eurobahnmotorsportsnc.com

  • Report this Comment On August 27, 2013, at 5:45 AM, jon2283 wrote:

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  • Report this Comment On July 26, 2014, at 9:59 AM, sophiabuscemi wrote:

    when i search I found it useful for yahoo and useful than AOL. when I was looking for BMW repair services, not sure what your exactly talking about http://www.eurobahnm.com

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