AOL is reportedly mulling a breakup where it would sell its dial-up business and then merge with Yahoo. The problem: All of this scheming is news to Yahoo.
Reuters is the latest to report on the whiteboard rumor that just won't die. Here's a look at the moving parts of what AOL is pondering:
- A breakup.
- AOL would sell the dial-up business, which still sends a ton of traffic to AOL properties.
- AOL would take its advertising and media properties and merge into Yahoo.
- This breakup would happen via a series of complex financial transactions so shareholders wouldn't get whacked on taxes.
- Yahoo hasn't been contacted about any of this master plan.
Admittedly, AOL's strategic plan sounds solid. It would sound even better at Yahoo. However, there's a big one word question that looms over all of this AOL-Yahoo speculation: Why?
Why would Yahoo entertain an AOL acquisition or merger? Altruism? To save the Web? Because it thinks AOL is a better asset than Alibaba? Yahoo would allegedly be taken private and then the international assets like Yahoo Japan and Alibaba (the best parts of the company) would be sold.
In other words, these AOL-Yahoo theories are hard to digest. Short of AOL getting its act together so its market cap pulls closer to Yahoo (just another $19 billion or so to go!) these concepts are largely fictional.
AOL pondering how to merge with Yahoo is the equivalent of me creating a plan to run a 4.3 40-yard dash, grow to be 6-foot-7, bulk up to 290 pounds and play defensive end for the Philadelphia Eagles. It's complete horsepoop. And it ain't happening.
In theory, private equity could swoop in and buy Yahoo and even break it up. Why would this breakup occur? Reuters reports:
"In order to complete a merger of AOL and Yahoo, Yahoo would also need to shrink in size, sources said."
Who shrinks to merge with a weaker player?
The "why?" question looms everywhere. Why would Yahoo want AOL? Sure, there's scale I suppose, but there are easier ways to get scale. The level of financial engineering needed to merge AOL and Yahoo is breathtaking.
Add it up and a Yahoo merger totally makes sense from AOL's perspective. It's a bit unclear what Yahoo gets out of this deal---other than maps, tech and entertainment content. Simply put, AOL needs to put together some serious financial improvements---potentially coming to a balance sheet near you in the second half of 2011---to even begin to entice Yahoo to think about a merger. AOL needs to reverse this chart:
As we stand today, there's no incentive for Yahoo to even ponder this fictional AOL deal.