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AOL reportedly mulling Yahoo merger

by Scott Bicheno on 6 December 2010, 09:33


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Something's gotta change

A couple of months ago a story emerged about AOL acquiring Yahoo that was generally considered to be a ‘trial balloon' - i.e. a story leaked to the press to see what effect it has on the share prices of the companies covered, to gauge investor sentiment on the matter.

Nothing happened in the immediate aftermath of that story, but it won't go away. Reuters wrote early this morning that AOL is mulling over a merger with Yahoo, but that it hasn't even got as far as running it past Yahoo yet.

The story quotes inside sources describing how far the thinking has got and the many obstacles that would have to be overcome to make it happen - most of which seem to concern minimising the tax implications of a merger.

While Yahoo started life as an internet directory and AOL as an ISP, both companies sought to generate additional revenue from the the traffic they were generating for their own web portals. In both cases this focuses on selling display ads against free content and services.

The problem is, not only are they competing against the likes of Google, Microsoft and Facebook in the Internet services business, but advertising revenue has been in the doldrums ever since the credit crunch, and it's getting ever harder to turn a profit via the traditional media sales model.

Apparently, if the respective companies want to avoid a big hit on such a deal, they would need to spin-off the parts of their respective businesses that don't concern content/display advertising. In the case of AOL, this is its ISP business, and with Yahoo this is its 40 percent stake in China's Alibaba Group Holdings.

Anyway, this looks like another trial balloon, but there's a good chance there's no smoke without fire, and the general feeling is that, despite relatively stable share prices, AOL and Yahoo need to do something radical if they're to survive, let alone grow, over the next decade.

Another bit of unconfirmed corporate news came from Bloomberg on Saturday. Its single source told it the proposed $6 billion acquisition of Groupon by Google is not happening. Apparently Groupon has been hesitating over what most commentators think is quite a generous offer, so Google has called the whole thing off. This, together with the reported bid in the first place, remains unconfirmed.

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