Merger May Boost AOL's Value, but Buyer Pool Shrinks

With Microsoft, Yahoo Out of the Picture, Google May Consider Purchase

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NEW YORK (AdAge.com) -- Microsoft's $44.6 billion offer to buy Yahoo indirectly added $6 billion to AOL's value, if Time Warner were to sell it off. But a deal may shrink the pool of buyers who might be willing to pay that much.

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Speculation about spinning off AOL has accelerated since Jeffrey Bewkes became Time Warner CEO on Jan. 1. If Microsoft and Yahoo join forces, AOL will become a lot more attractive to a rival company, such as Google.

"Google, which is facing increased pressure to grow display advertising, could benefit from the additional display-ad inventory that would accompany an AOL acquisition," according to a note put out last week by UBS Investment Research. "Google could also benefit from acquiring AOL's Advertising.com network, which is one of the strongest display-advertising networks."

Analysts at UBS Investment Research calculated that Microsoft's offer valued Yahoo at 15 times its estimated 2008 earnings before interest, taxes, depreciation and amortization; applying the same multiple to AOL's ad business values AOL at nearly $19 billion. Its previous estimate: $13 billion.

"All of a sudden, it helps people sharpen their pencils and do a similar valuation on the AOL business," David Katz, chief investment officer at Matrix Asset Advisors, told Bloomberg News last week.

Lost gains
Investors sensing the potential initially drove Time Warner stock as much as 9% higher early Feb. 1, although those gains eased substantially as the day went on.

But there's no fait accompli. Google already owns 5% of AOL and may benefit more from increasing its stake than buying AOL outright. "Overall," UBS concluded, "we are not convinced that Google would want to purchase the AOL business."

If Microsoft swallows Yahoo, moreover, both would exit the pool of potential bidders for AOL. "The potential marriage of Microsoft and Yahoo robs AOL of the two most likely and able suitors," said Michael Nathanson at Bernstein Research.

And Time Warner, which declined to comment, may even decide that AOL and its display-advertising capabilities will remain where they are.
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