Do AOL and Yahoo! Need One Another?

What's old is new again.

Reuters is reporting that AOL (NYSE: AOL  ) CEO Tim Armstrong is feeding its largest shareholders the merits of a combination with Yahoo! (Nasdaq: YHOO  ) .

According to a large AOL shareholder present at one of the meetings, Armstrong is emphasizing that a combined company could save $1 billion to $1.5 billion in synergies alone. The dual platform would also make it more compelling to ad agencies.

Combination talks aren't new. Yahoo! and AOL were rumored to be hooking up last year. Corporate culture discrepancies aside, uniting the two companies -- dot-com darlings that have been struggling in recent years to keep up with Google (Nasdaq: GOOG  ) in generating ad revenue -- does make a lot of sense.

The rub has always been -- and will continue to be -- who runs the show after the pairing. As a former Google exec, Armstrong would be the natural choice, but AOL's stock has flopped under his two-year watch. AOL is also substantially smaller than Yahoo!, leading some to wonder if he can handle the larger combined entity.

This deal is unlikely to happen. Yahoo! isn't likely to be buying any company as it explores strategic alternatives that may result in a sale of the company itself. It has reportedly bowed out of the Hulu bidding war.

On the other side of the nuptials, AOL would be too small to pull this off. Microsoft (Nasdaq: MSFT  ) or China's Alibaba are in a better position to do it. However, if a consortium of private equity firms are the ones that emerge victorious, it wouldn't be a shock to see AOL buying some pieces of Yahoo! if they are made available.

We should get a greater sense of the urgency at both companies when they report their third-quarter results in the coming days. However, two companies aren't necessarily meant to be just because a match makes perfect sense on paper.

If you want to follow the Yahoo! saga closely, add Yahoo! to My Watchlist.

The Motley Fool owns shares of Google, Microsoft, and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!, Google, and Microsoft. Motley Fool newsletter services have also recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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