Who Wins in a Yahoo-AOL Deal? Time Warner

But Analysts Aren't Sure It's Yahoo's Best Move

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NEW YORK (AdAge.com) -- The marriage of AOL and Yahoo could be Christmas come early for Time Warner.
Jeff Bewkes
Photo: AP

Jeff Bewkes

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One motivation for Time Warner to set up AOL up with Yahoo is to save its once high-flying internet brand from being a distant last place player in the giant portal space; but even more, this is the perfect opportunity for the company to rid itself of its Achilles heel.

Time Warner and Yahoo have continued talking, according to executives familiar with the situation. The Wall Street Journal reports the two are serious about a deal that would have Time Warner contributing AOL plus cash in exchange for a 20% stake in a combined entity. Meanwhile, Yahoo would woo shareholders by promising to buy back some of its stock (with the cash from AOL) at a price higher than what Microsoft is offering.

Partner with Google
Partnering with Google on search could help sweeten the deal. Google already handles AOL's search advertising business and has a 5% stake in the portal.

But to Time Warner, the benefits would be two-fold: First, it's a viable solution to the 8-year-and-running debacle of the merger that was AOL Time Warner. Time Warner's stock has never returned to pre-AOL levels, its other corporate units never liked AOL, and now Time Warner CEO Jeffrey Bewkes, who was head of HBO at the time of the acquisition, is calling the shots and has long been said to have opposed the merger with AOL.

Some also suggest it would be a graceful way to unload AOL leadership, which has been criticized both publicly in blogs and privately in the marketplace over their decisions and operating tactics. However, a Time Warner insider said corporate management is fully supportive of AOL CEO Randy Falco and the strategy to grow advertising through the ad network. Replacing Jon Miller with Mr. Falco as CEO of AOL was one of Mr. Bewkes' early -- and very public -- major corporate decisions.

Pali Research Analyst Rich Greenfield said a Yahoo-AOL merger would offer little more than short-term cost savings, "with AOL employees (and TWX investors) realizing that even their senior management now believes their long-term prospects are grim on a stand-alone basis."

Forcing Microsoft's hand?
To be sure, the talks must be serious to have Time Warner spending its time on it, but in reality, the biggest boon for Yahoo in all this chatter is that it now has another negotiating tool to get Microsoft to lift its $31-per-share bid -- Microsoft CEO Steve Ballmer publicly called Yahoo out last Saturday for not having any real alternatives despite Yahoo's having reached out to many companies in the space.

But analysts are doubtful Time Warner offers a viable alternative to Microsoft, as it represents a long-term strategy rather than a short-term payout.

"For Time Warner, we applaud the effort, but fear that Yahoo shareholders aren't in the mood to forfeit cash and stock for a riskier, albeit potentially more lucrative, outcome," wrote Citigroup Analyst Jason Bazinet. "In this sort of market (recession, tepid ad market) we suspect Yahoo shareholders want more cash, and fewer pro forma projections."

And as if going up against cash-rich Microsoft in a Yahoo deal wasn't already difficult, the battle becomes especially tougher if New Corp. gets together with the software giant to make a play for Yahoo, as is being reported. That is a switch from earlier discussions, which had News Corp. potentially partnering with Yahoo to thwart the Microsoft acquisition. (Rupert Murdoch dispelled that chatter, saying, "We're not going to get in a fight with Microsoft.")

Can outbid AOL
"At the end of the day, Microsoft has the balance sheet to bid virtually any price for Yahoo and we simply cannot imagine them losing out to AOL, with potential stakes in MySpace (and Facebook) giving them significant insight into the world of social media and advertising. ... While AOL (and in turn, Time Warner) ends up as the biggest loser with no obvious partners left and a stronger competitor," wrote Mr. Greenfield.

Citigroup's Mr. Bazinet offers another scenario in his report this morning, beyond what has been mentioned in the press: "If Time Warner and News Corp are both unsuccessful, could the two tertiary players join forces? While a pro forma entity would certainly be subscale relative to Google and Microhoo, such an entity could face better long term prospects than either entity does on a stand alone basis."
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