Yahoo is continuing its marathon merger discussions with AOL, sources close to the negotiations have whispered to us, and a deal could happen as early as this month. Is this just a rehash of the reported discussions in February and then again in April?
Yes and no. It’s clear that AOL’s parent company, Time Warner, wants this deal more than ever. What isn’t clear is whether AOL’s assets will fix any of Yahoo’s problems.
The deal structure that is currently being discussed is Yahoo’s acquisition of AOL (content, services and advertising), minus their subscription dial up business. That plus a couple of billion dollars in cash from Time Warner gets them approximately a third of the combined entity. Time Warner’s AOL headache is gone, and they have a stake in the world’s most valuable chess piece in the Google/Microsoft search and advertising war.
Factors favoring a deal: the companies believe Yahoo’s advertising platform would monetize AOL assets far beyond what they’re generating today (a little over $2.4 billion annually). And those against: combined dominance in mail (they’d have 48% of all worldwide email accounts according to Comscore, with Microsoft #2 at 42%) and instant messaging (39% worldwide combined market share, compared to 55% for Microsoft). In reality, though, email and instant messaging market share are only a problem if Microsoft then comes in and buys the combined entity.
Yahoo gets to make a case to stockholders that they dominate the online portal/services/content world, and who cares if they outsource search advertising to Google. Our position is that they can’t succeed in the long run without strong and competitive search advertising, although it may take the Department of Justice to get that message through to Yahoo’s executive team. Even after these entities combine, if they do, Yahoo still has a major long term competitive problem on its hands.