BUSINESS BLOGS
BUSINESS BLOGS
category: business
11 Feb 2008

Yahoo! and AOL are back at the table discussing a merger, supposedly, as both companies are caught between a rock and a hard place.

- Yahoo! is being targeted by MSFT in an unsolicited $45B takeover bid.

- AOL is persona non grata at Time Warner.

While AOL and Yahoo! might very well consider merging, I doubt this will really fly for a few reasons:

- Google bought 5% of AOL for $1B, valuing it at $20B. Time Warner has since invested in many promising online assets, such as Tacoda and Quigo. TW’s board will ask for at least $20B, if not more.

- Time Warner is saddled with $35B in debt, I am not sure it will be happy with getting YHOO stock, it will ask for cash, YHOO only has $2B on its books.

- If YHOO merges with AOL, the prevailing wisdom is that YHOO will seek to replace Google’s search (who powers AOL search and provides ads) with YHOO’s own. With Google’s own growth rates slowing down, Google won’t allow this will - as we have long argued - show an interest to acquire AOL or sweeten the deal, anything to block this deal, meaning that YHOO and AOL will never be able to merge, unless Google allows them to.

- Of course, Google is desperate to avoid YHOO from being bought by MSFT, so conceivably, it might not get in the way of such a merger.

- But there is no way Google will allow YHOO to push it out on AOL, because that will only make Google’s growth rate slow even more…

This is why I argued that AOL and Google’s deal set the stage for MSFT/YHOO.

YHOO has said that it will take $40/share to get it to talk to MSFT… we think YHOO is trying to get MSFT to do just that.

Something tells me that MSFT’s going to pull out all of the stops and come in with an aggressive bid. Let’s face it, most shareholders would accept the $31/share price… if they come in at $35-40 it will be very hard for YHOO’s CEO Jerry Yang and the board to argue against a sale.

Yang is arguing that left to his own devices, he can get YHOO stock to $31/share… he’s lost the faith and patience of most investors… let’s see how MSFT reacts this week.

Mind you, in our strategy for YHOO to remain independent, they do end up buying AOL, but that is Step 5 of a crazy 6 step program to remain separate from MSFT.

Disclosure: Long YHOO