At least two private equity firms, Silver Lake Partners and Blackstone Group, are interested in buying Yahoo and merging it with AOL, putting together two pioneering web portals with uncertain futures, according to a report in The Wall Street Journal.
But does that make any sense? Here are two opposing arguments.
For starters, complexity alone would kill this deal in the crib, especially if the Yahoo board resists a deal like it did with Microsoft. And unlike 2008, this isn't Microsoft buying a smaller company; rather, a complicated buy-out between AOL, Yahoo, Yahoo Japan, Chinese joint venture Alibaba, the above-noted PE firms, and probably others. At the end of the day, it would be a paper deal that would result in little overall media value.
It boils down to this: investors like AOL CEO Tim Armstrong, but worry his company might be unsalvageable, and, after 21 months, many have lost faith in Yahoo CEO Carol Bartz. But to merge Yahoo and AOL would be a very expensive proposition. It would be easier and cheaper to pay out the remaining 18 months of Ms. Bartz's contract and to hire Mr. Armstrong at double his AOL salary.
Henry Blodget and others have, however, argued that the real value of such a merger would be to create a portal monopoly, much the way that Google has a near-monopoly on search and Facebook has a near-monopoly on social networking. But who wants a "portal" monopoly any more than a monopoly on newspapers? These days, it's about diversification.
Google and Facebook function as content-neutral toolsets -- they simply have the best tools for search and for organizing online relationships. Content is different. Audiences build loyalty to brands and advertisers buy audience segments in context. A generic one-stop shop doesn't make those brands any stronger, or audiences more loyal. The reason to do a deal is to merge scale with pricing power, but commodity-like content at premium prices does not represent value to anyone -- readers, advertisers or this supposed hybrid monster itself. --Edmund Lee
It's easy to see why this idea has taken hold: AOL is a declining business but with a sharp focus and a good leader in former Google exec Tim Armstrong. Yahoo is a stagnant business with departing executives and a leader, Carol Bartz, who hasn't moved the needle for the company in 21 months.
While their approaches and assets are different, AOL and Yahoo are in the same business, which is selling online display ads to brand advertisers, and that's a game of scale. Both would benefit from being the biggest player in that space, and they have duplicate assets such as e-mail and maps that would be better competitors to Google and Microsoft together than they would apart.
In display ads, not only would AOL-Yahoo be the biggest, they wouldn't even have much competition. Google, aside from YouTube, doesn't own enough premium display properties to compete with Yahoo or AOL. That's why both Yahoo and AOL are pursuing premium content strategies, albeit with mixed success. There's more revenue associated with a premium brand ad on a site you own versus one you place on another site.
One thing is certain: without some kind of deal or change in course, both face fuzzy prospects. We know online ads started to turn around in the second quarter. Can Yahoo grow along with the newly-invigorated online ad market? Are Mr. Armstrong's efforts at a turnaround bearing any fruit at AOL? We'll learn more about the state of both companies when they report third-quarter earnings in the coming weeks. But a 'no' answer on both those questions and we'll see a deal of some type in the near future. --Michael Learmonth
What do you think about a AOL-Yahoo combo?