It's easy to see why AOL's porch may be filling with gentleman callers. Its revenue-sharing search deal with Google
Yes, AOL is pretty cheap these days. Google paid $1 billion for a 5% stake five years ago, and that kind of change would be good to buy nearly half of AOL at today's enterprise value of just over $2 billion. Even if we bake in a healthy buyout premium, a buyout can be had for less than $3 billion. It's a far cry from the 12-figure market cap that AOL commanded at the peak of the dot-com bubble.
You get what you pay for
The rub with AOL as an acquisition target is that it's been backpedaling through most of the past decade. Its latest quarter was another disaster, with revenue, net income, and free cash flow all taking double-digit percentage hits.
AOL may seem cheap at 11 times trailing earnings, but it's actually fetching 15 times the $1.41 a share that analysts are expecting for all of 2010. It seems to be a perpetually sinking target, since those same pros were looking for a profit of $2.66 a share just two months ago.
There's no bottom in sight. Wall Street sees revenue falling 24% this year, and another 10% come 2011.
Why would someone snap up a retreating company when it should very well get cheaper in the future? Well, the bidding nature of any reverse auction is to come in at a low price, without risking another buyer. If a potential buyer waits for a bottom, it would also be less likely for AOL to consider cashing out. Besides, buyers are arrogant. If and when someone does snap up AOL it will be with the foolhardy arrogance that they're the one to stop the bleeding.
So who's on the porch? Let's take a look at some of the potential suitors.
Mr. Softy continues to lose money in its online division, despite Bing's success. Snapping up a profitable AOL would more than double Microsoft's online revenue. AOL and Microsoft also run in the same circles as competing platforms for free email, search queries, and content-backed page views.
It's a deal that would make perfect sense, especially if it means keeping AOL out of Google's chubby clutches.
As successful as the world's leading search engine has been, it's often betting on the wrong horse. It has shelled out good money for primo advertising space on AOL and MySpace, just as the properties were peaking.
It may have little choice but to get involved here, even if it knows the value -- or diminishing lack thereof -- in serving up ads to AOL's visitors. It already let Microsoft strike a search deal with Yahoo!
There's $3.2 billion in cash and short-term investments burning a hole in Yahoo!'s pockets, at a time when investors seem to be writing the company off after last year's deal with Microsoft.
AOL and Yahoo! have been joined at the hip as the saddest Siamese twins on the dot-com circuit in recent years, but Yahoo!'s latest quarterly report was everything that AOL's wasn't. Display advertising is roaring back. Earnings are growing. There is enough overlap in the two companies to create some serious margin improvement, too.
One of the biggest mysteries at AOL has been its decision to all but abandon its once lucrative online access business. AOL had as many as 26.7 million access accounts when it peaked eight years ago. It's down to a mere 4.7 million users today.
If it didn't see value in keeping paying subscribers on its welcome screen, it should have sold its access business to United Online or Earthlink
United Online can't afford AOL on its own. And, to be fair, United Online also has seen the writing on the wall with its Juno and NetZero access roots. It has spent the past few years diversifying into Classmates.com, MyPoints, and floral delivery network FTD. If it can pull a deal off, it can fortify its access and content businesses. If not, United Online or Earthlink may be key players in snapping up AOL's remaining access customers from the portal that does ultimately buy AOL.
Ask.com's parent is blessed with a cash-rich balance sheet, but not enough to land AOL outright. However, the country's fourth largest search engine would aid its chances for medal contention by unhinging its jaws wide enough to swallow down No. 5.
If AOL is truly available -- and it should be given its dreary near-term prospects -- things should get interesting quickly at this point.
Microsoft is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services, free for 30 days. Yes, just like the old AOL 30-day trials, only smarter.
Longtime Fool contributor Rick Munarriz wonders whether 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.