What MSFT-YHOO Means For AOL (TWX)

Henry Blodget | February 2, 2008 10:27 AM

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What does the long-awaited consolidation among the big portals mean for AOL?
  • AOL cannot survive in current form (big generalist with lots of properties and no clear strategy). If Microsoft-Yahoo goes through, AOL will be a distant, nebulous, US-centric also-ran in a business dominated by two elephants.
  • AOL should be spun off or sold in pieces (or both). It has been clear from the past eight years that Time Warner has no interest in "synergy." (If it did, there might be some advantage to keeping AOL within the Time Warner fold). Given this, AOL should be spun off immediately. If Microsoft/Yahoo goes through, it will be the only remaining belle at the ball, and lots of other parties might be interested in all or parts of it.
  • AOL (or pieces of AOL) could still end up with Microsoft or Yahoo. After the Microsoft bid, pundits rushed to conclude that AOL could no longer be combined with Microsoft or Yahoo. We think this conclusion is wrong. Even if AOL, Yahoo, and Microsoft combined forces, the combination would still be smaller than Google. Why couldn't regulators be persuaded that this should be allowed?
  • AOL could influence the fate of Yahoo and, in so doing, improve its own position and value. Yahoo is desperate to put together a non-Microsoft solution. AOL could have a hand in what happens to Yahoo, and improve its own competitive position at the same time.
So what should AOL do? Get on the telephone to Yahoo, Microsoft, Google, private equity firms, and investment bankers. Specifically:
  • AOL should immediately talk to News Corp and private equity firms about being a part of a competing Yahoo bid. Perhaps AOL could be spun off and the two companies combined (with MySpace?).
  • AOL should talk to Yahoo about putting together a competing Yahoo transaction, in combo with private equity. Same as above, except without News Corp.
  • AOL should talk to Google about a much tighter partnership if Yahoo-Microsoft proceeds.  If nothing else, this would increase the pressure on Microsoft and Yahoo to factor it into any transaction.
The other alternative: Allow the Yahoo situation to proceed, but restructure AOL into separate companies and find the best homes for them. Specifically:
  • Roll up the content businesses (Finance, news, TMZ, etc) into an Internet media division. Perhaps Time Warner would like to keep this.
  • Put AIM, ICQ, and Mail into a single "communications" business and merge it with Yahoo, Google, Microsoft, or Skype.
  • Position Platform A as the leading ad network, and eventually transform it to sell and place ads for all media (as Google wants to).  Keep within Time Warner or spin out.
  • Sell the access business to Earthlink or a cable company.
What not to do: Sit around. Hope. Pray.

See Also:
Yahoo in Play: Your Handy Guide to the Deal of the Decade

Why AOL Needs To Do Something
Playing the AOL-Yahoo-Microsoft Chess Game
Why Yahoo Should Buy AOL
Why Microsoft Will Steal AOL from Yahoo

Complete Coverage: Microsoft's Bid For Yahoo!


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Porky said:
Google won't want to own AOL - extend co-operation with AOL in certain areas, maybe. Spinning AOL off is possible (though as we enter a recession timing looks off & AOL cannot yet in any sense show themselves to have turned a corner), but splitting up AOL doesn't ultimately work. The ad network needs the owned/operated publishing business (quote Falco "They travel together"), the publishing business in turn remains heavily reliant for clicks on the access subscriber. AOL should view the purgatory period an MS/Y! combination will force on its two competitors, & the suspension of innovation that this acquisition will produce within that combined entity for the next 18 months, as its own opportunity. AOL's opportunity lies in launching new products that Google, for whatever reason, doesn't want to, because they're not a direct fit with Google or Googlish in nature, but then co-operatively integrating them with Google properties as well as its own, giving Google a participation in the revenue/capital of the separate consumer brands created.
Nick C said:
Who knew the end of the road would look like a game of musical chairs? Time to face facts: GOOG has zero interest in any more of AOL. They get what they want (AOL search) now and there is nothing else of interest to them in the company. A Yahoo/AOL combination would have less punch than Laverne and Shirley. Adding Microsoft/Squiggy to that equation doesn't change much. Why would Newscorp want AOL? What would it add for them?

TWX let AOL wither on the vine while it invested in cable (maybe an AOL/Roadrunner combination? Nah, too complex). Spinning off a still-contracting, not yet at the revenue/ebitda bottom AOL doesn't seem like a viable strategy. Perhaps you could securitize AOL with David Bowie bonds (or a good reverse mortgage).

Time Warner now gets to reap what it has sown. There is a difference between crashing and landing, unless TWX is your pilot.
The Facts said:
Yes, AOL should spin off and become its own company. TW and AOL have never played well together and TW is holding AOL back now and sucking out all of the profits.

However, you've got the financials and strategy wrong. AOL isn't doing badly like the media likes you to believe and they really have a chance to leap ahead while MS-Yahoo are busy for 6-12 months figuring out their future. What a great opportunity to grab market share.

In the end maybe they should just change their name. It seems that everyone loves to hate the AOL brand nowadays. Why not just go foward with being Platform A or some other better branding? People forget old brands very quickly... Verizon anyone?
CV said:
What about the prospect of selling off AOL's content properties to a large media company like NBCU? Falco has the GE connection and NBC is still looking for a strong online indentity. Having AOL's internet media properties may be the right fit for NBCU's digital strategy.
Matrixed said:
Call me crazy - I think the tighter relationship with Google makes sense. AOL is the one company out of the big three that has played well with Google in the past, and any recent contentions between the two would be quickly smoothed out by a controlling interest.

Platform A is not only a network of properties (some #1 in their class), but also includes Ad.com (growing like a weed) and the suite of tech acquisitions (including Tacoda and Quigo recently). A nice array of assets that would be attractive to Google for the display space.

Finally - a point about MSFT/YHOO. Despite the article on SAI indicating Madison Ave's initial approval of the deal, I'd wager many agency buyers would have a different reaction -- especially when the newly combined entity begins collaborating on a ratecard. It's tough negotiating when one player nearly has the whole market cornered. It's in the agencies best interest to have a strong alternate choice in the marketplace. This makes Platform A valuable to the buyers, and Google.
msinsideout said:
If MS-Yahoo goes through, it will mean tough times for many many people. Yahoo has lots of online service sections, besides search and mobile, it has hotjobs, personals, online shopping and car selling, etc. While Yahoo can co-exists with many compititors, MS has a history of killing its compititors. I remember Sun-down was one of the buzz-word inside MS a few years ago, means Sun Micro Systems was already down from the list, in which Google was at the top then and now. If Yahoo merges with MS, the MS culture of killing and monoply will prevail. Then the bad time for those companies like Monster etc which have overlapping business with the current Yahoo will come.

The next worrysome people group will be Yahoo employees. If Jerry Yang goes with the layoff procedure, he could at most cut about 10-20%. But if merges with MS, I doubt MS will continue use the skill-set of Yahoo people, i.e. openbsd, java, etc. so most people, perhaps 50% of yahoo people would have to go.
gAOLgle said:
Instead of wasting time in trying to buy Yahoo together with News Corp., AOL should buy ValueClick or anyone else left. Smaller acquisitions that can be executed in months and not in weeks. This could be possible as long as MSFT and YHOO are still talking to each other.

Ballmer will expect counter offers for YHOO and he has enough money available. He is not the guy who will give up. It could make sense to come up with a counter bid to make the whole thing as much painful and slow as possible.

The MSFT/YHOO deal could be an advantage for AOL (and Google): YHOO was not able to integrate all the cool Web 2.0 companies that they took over. The merger will take years, they will annoy customers and users, all their energy will be wasted in integration and migration projects and innovation won't happen during this time.
gautam madeshia said:
"What not to do: Sit around. Hope. Pray."

lol. that was funny :)

google really forcing ms / yahoo / aol to take strange business descisions....

people at google must be really enjoying the show.
Henry Blodget said:
Stone, agreed. Many good properties. I just don't see an overarching strategy/brand that ties the whole thing together.
stone said:
AOL just spent $1B on ad technology companies and bought some damn good ones --- ad.com, Tacoda and Quigo.

I don't see the "tighter" relationship with Google. Google already does all the search business they can with AOL and can't do much more on the ad side.

I do agree that AOL needs to do something. A spin off is the best route, perhaps in combination with an equity investment from the likes of News Corp. or Google, or even Yahoo. Yahoo would love to get the seach traffic back when their Google contract expires.

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