Why AOL May Just Abandon Bebo Rather Than Sell It

Michael Arrington

J. Michael Arrington (born March 13, 1970 in Huntington Beach, California) is a serial entrepreneur and the founder of TechCrunch, a blog covering startups and technology news. Arrington attended Claremont McKenna College (BA Economics, 1992) and Stanford Law School (JD, 1995) and practiced as a corporate and securities lawyer at two law firms: O’Melveny & Myers and Wilson Sonsini Goodrich... → Learn More

Wednesday, March 10th, 2010

Newly independent Aol is still struggling with the fate of Bebo, the social network they acquired for $850 million in 2008.

No one argues that Aol underpaid for Bebo. And the social network has fallen from 22 million monthly unique visitors when it was acquired to just 14.6 million today (Comscore worldwide). But even so, Bebo clearly has some value on the open market.

Despite that value, Aol’s best financial option for Bebo will likely be to abandon it rather than sell it, say corporate tax experts we’ve spoken with.

Here’s why – complicated corporate tax rules will let Aol write off the full purchase price of Bebo if they declare it worthless and abandon the asset. With Aol’s effective tax rate of around 45%, that’s $380 million and change in their pocket in taxes that they’d be able to avoid.

A sale of Bebo would almost certainly be less attractive. If someone were to pay them $100 million for the service, which is optimistic, Aol could still offset the remaining $750 million as a tax loss. But it could only apply against long term capital gains, and Aol doesn’t have any to offset against. They’d have to carry that loss forward and hope for future gains to offset it against.

One corporate tax attorney we spoke with wouldn’t discuss Aol specifically, but did confirm the logic of the approach. Bryan Smith, a partner at Perkins Coie, says “Without getting into any specific facts or companies, it will often be more attractive for a U.S. corporation to simply shut down a subsidiary and claim a deduction for the worthlessness of the stock against ordinary income instead of selling the stock at a distressed price and taking a capital loss, which may only offset capital gains.”

If Aol were to abandon Bebo they couldn’t pull any of the assets of the company back into Aol, say the experts we’ve spoken with. Otherwise it becomes a non-taxable liquidation. If Aol had debt or preferred stock on the books with Bebo, though, they could pull out assets to offset that liability.

Company: AOL
Website: aol.com
Launch Date: May 24, 1985
IPO: April 12, 2009, NYSE:AOL

AOL is a global advertising-supported Web company, with display advertising network in the U.S., a substantial worldwide audience, and a suite of popular Web brands and products. The company’s strategy focuses on increasing the scale and sophistication of its advertising platform and growing the size and engagement of its global online audience through leading products and programming. History of Aol: AOL was founded in the early 1980’s as Control Video Corp, with an online service, Gameline, for the Atari 2600 console. ...

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Company: Bebo
Website: bebo.com
Launch Date: January 6, 2005
Funding: $15M

Launched in July 2005, Bebo has steadily risen to become one of the world’s most popular social networking sites. Users can create profiles on the site for free, stay connected with friends, watch videos, and listen to music. In early 2008 Bebo had over 34 million registered users and 7 billion monthly page views. Bebo’s founders have extensive experience in online social networking, having been involved in the founding and building of such companies as Birthday...

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