Do you AOL-Yahoo? Maybe you will, if they merge
AOL and Yahoo are destined to merge, or so said Merrill Lynch analyst Jessica Reif Cohen in a note entitled "Is 2007 the year AOL and Yahoo are in play?" that was sent to investors shortly before the Christmas holiday. Both companies have itches in need of much scratching. Yahoo's problems have been quite visible as of late, as noted in the now infamous Peanut Butter Manifesto. To boil it down to an oversimplification that's still technically true, Yahoo is feeling the heat from Google.
AOL, on the other hand, is feeling the heat from, well, the Internet. The marriage of Time Warner and AOL has always been tough to understand (unless you're Steve Case), and Time Warner has flirted with the idea of selling AOL more than once (they're reportedly thinking about it again, after deciding "no" last year). As of late, the company has been plagued by declining revenues from its search program, which makes sense given that the number of users heading to that portal appears to be dropping off. In the wild world of mergers and acquisitions, this means that AOL needs to toughen up or jump ship, and toughening up is often done with a few reps on the Acquisition Trainer 3000.
Why would either AOL or Yahoo consider a merger? AOL's move away from its subscription business (which miraculously is not already dead) has resulted in the company putting far more emphasis on Internet advertising. And what better way to boost advertising than to add a giant cache of eyeballs to your portfolio? On most days, Yahoo is the top destination online, with eyeballs aplenty. And if Yahoo is in trouble (which I don't think it is, yet), AOL may be on the other end of the phone: "You've got salvation!" Or it could swing the other way, with Yahoo taking AOL off Time Warner's hands. Only one thing is really clear: both companies are encountering doubtful investors, and both companies overlap enough in technology and operating costs that a merger should potentially mean more profit. The note suggests that a Yahoo purchase of AOL could bring a positive upswing for Yahoo in as few as two years, even if the acquisition price was $18 billion and only covered AOL's advertising business.
For its part, the Merrill Lynch note only concludes that this is a strong possibility for 2007, not a foregone conclusion. I bet that's good news for Microsoft. The company's attempt to ramp up its search to compete with either Yahoo or Google looks to have stalled. A Microsoft-Yahoo merger isn't totally out of the realm of possibility, and the Merrill Lynch note even acknowledges this. Microsoft could make another pass at AOL, but that strikes me as a fantastically bad idea, given the "Power of Greyskull" effect of combining the two company's troubled public images (I can see the headlines now: Match made in hell: Microsoft buys AOL).
The full list of "possible" suitors for AOL includes eBay (considered "not likely" according to the note), Google, Interactive, Microsoft, Comcast (not likely), News Corp. (not likely), Mr. Magoo (just kidding), and NBCU (not likely). Most curious thing about the research note? In running down a list of "cons" relating to the possible merger, "AOL Stigma" is listed for almost all possible suitors except for notably Google, Yahoo and Microsoft.
:source: Source: http://arstechnica.com/news.ars/post/20061226-8498.html
