Stephen Foley: How to respond to AOL and Yahoo deal talk
Saturday 16 October 2010
US Outlook: There is only one proper response to the idea that Yahoo! could be target of a buyout by private equity, and that is: LOL.
I'm loath to say it definitely will not happen. There are plenty of precedents for buying and levering up companies in structural decline, but they are not happy ones. Guy Hands of Terra Firma is due in court here on Monday, litigating the mess that is his takeover of EMI. And we are still getting jaw-dropping exposés of management incompetence at Sam Zell's Tribune newspaper group, two years after it landed in bankruptcy.
But I haven't found anyone yet who thinks the numbers could possibly be fudged sufficiently to justify a private-equity funded reverse takeover of Yahoo! by AOL, an idea which has been swirling round Silicon Valley this week.
With a market cap of around $22bn (£14bn), Yahoo is many times the size of AOL, which is worth $2.7bn, but what they have in common is the same deluded idea that they can be major content companies on the internet.
Web audiences are fragmenting between must-read specialist sites and mobile apps, or disappearing into social networks – so the AOL or Yahoo! menu of recycled news and uninspired features is not a guaranteed cash cow, especially now online advertisers are finding many new options.
What about turning the tables and making AOL the target? Yahoo! at least has a lucrative display ad network, which might be enhanced if it were to swallow AOL, using its newly inflated shares as currency and taking the opportunity of a merger to do the necessary cost-slashing across both companies. Even that, though, seems like an unappealing distraction from the real business of finding a new raison d'être for both companies, something which clearly eludes Carol Bartz, chief executive of Yahoo!, and now one assumes also eludes Tim Armstrong at AOL, if the rumours of his keenness to merge are true.
The one thing that could be said for going private is that Yahoo! would be able to take a more radical approach to reshaping its business than is possible in the limelight of the stock market. I'm afraid, though, the whole thing might be just another dream.
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