Yahoo-AOL: No Guarantee Of Success

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They were once the golden brands of the Internet. But there’s hardly any guarantee that a combination between Yahoo and AOL would bring back the shine to either company.

The possibility of such a deal was raised Friday when activist investor Starboard Value, which owns a large stake in Yahoo, sent a letter pressuring CEO Marissa Mayer into exploring a union as part of its effort to “unlock tremendous value for the benefit of all Yahoo shareholders.”

Yahoo is reviewing the Starboard letter. In an appearance on DroxTech, AOL chief Tim Armstrong mostly deflected the merger talk. “So I think those rumors speculate because people think about scale a lot in this marketplace,” he said. “The reality is AOL has tremendous scale and has actually been moving up the scale rank. So we’re manifest destiny and really focused on what we are doing, our strategy.”

The potential motivation for a Yahoo-AOL pairing is that together the two could better compete in their respective core advertising businesses than either could do separately. Google and Facebook currently dominate the ad market.

Starboard claims a Yahoo-AOL partnership could deliver cost synergies of up to $1 billion, largely by reducing the overlap in the company’s display advertising businesses.

But there’s considerable doubt. In a report to clients, Bernstein Research analysts Carlos Kirjner and Peter Paskhaver wrote that “an acquisition of AOL is rife with risk for Yahoo and its shareholders and (we) disagree with Starboard that (such a) deal would create value, particularly if Yahoo were to pay a significant premium.”

Forrester Research analyst James McQuivey is also skeptical. “There are mergers or acquisitions that lead to growth and innovation and then there are mergers and acquisitions that are just designed to figure out how to stay alive longer,” he says. “In the case of Yahoo and AOL it’s not even clear that those kinds of companies will even need to exist anymore. Simply making a bigger version does buy you some time in the short run but doesn’t lead to any guarantees about the future of that business. You don’t really need to be on the Yahoo or AOL page anymore as an advertiser.”

McQuivey compares a potential AOL-Yahoo merger to the pairing of Sirius Satellite Radio and XM Radio, something that stretches but doesn’t necessarily preserve the long-term business prospects.

Yahoo has made around a dozen acquisitions that have not improved its online advertising business, including the very pricey $1.1 billion acquisition of Tumblr in 2013. So what does Yahoo do now? “To me you look for a mobile play, a gaming play or you look for both,” McQuivey says.

That won’t be easy. On the gaming side, a number of prime properties are already off the market, with Microsoft gobbling up Minecraft recently, Amazon grabbing video game streaming service Twitch, and Facebook having acquired Oculus.

AOL meanwhile has doubled-down on text and video, McQuivey says. But “being original in text in a way that draws an audience and advertisers is turning out to be very very hard to do….” and video, has become a commodity game.

In mid-morning, shares of Yahoo were trading up around 1% to just over $41. Shares of AOL were down .16% to $44.48.

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