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AOL hiring financial muscle to work over Yahoo bid?

Image used with permission by copyright holder

The Wall Street Journal (subscription required) reports that struggling online portal and advertising company AOL has hired financial advisers to explore strategic options—including the possibility of joining forces with Yahoo to better compete with the likes of Google and Microsoft. Although nobody is reported that AOL has actually reached out to Yahoo to broach a deal, industry watchers have AOL considering a proposal to combine AOL’s online business operations—which include many overlapping services like email, photo sharing, video sites, and news offerings—while selling off Yahoo’s considering Asian assets (including large stake in China’s Alibaba and Yahoo Japan) to soften the blow for investors. Other speculation has AOL joining forces with other media companies—such as Rupert Murdoch’s News Corp—and private equity firms to stage a leveraged buyout of Yahoo.

Neither Yahoo nor AOL have commented on the Wall Street Journal’s story. Reuters reports sources within Yahoo claim the company is not considering any proposals, nor has it solicited any. Any merger or acquisition involving Yahoo would likely involve divesting the company of its equity in Alibaba and Yahoo Japan, something Yahoo CEO Carol Bartz indicated last month was not on the table.

The companies previously considered joining forces back in 2008, when Yahoo was scrambling for ways to get out from under a hostile takeover attempt from Microsoft. The talks ultimately led nowhere as Yahoo was able to put down a shareholder revolt lead by Carl Icahn, install a new CEO, and embark on an ambitious turnaround plan that included handing back-end operations for its Internet search services to Microsoft. However, although Yahoo has been rolling out new services—including new search features and a socially-aware mail interface—the company is still struggling to capture mindshare against the Googles and Facebooks of the world.

The real question in an AOL-Yahoo merger is what AOL could possibly bring to the table—and how AOL could afford to wrangle such a deal—now that its glory days as America’s leading gateway to the Internet and media conglomerate are long behind it. AOL runs its own search operation—powered by Google—that accounts for around 3 percent of the U.S. search market—that’s enough to register, but not enough to interest Yahoo in being taken over. AOL also operates a number of free services like email, news, and photo sharing that, for the most part, are also-rans compared to the size, quality, and scope of Yahoo’s operations. AOL has invested in a number of services, branded sites like Engadget and TechCrunch, social networking and has recently been making a play in local news and information. However, like search, many of these offerings have failed to gain traction with users. AOL is also facing a steady decline in revenue, including a 26 percent decline for the third quarter of 2010 due to drops in search and display advertising. Some industry watchers characterize reports of AOL seeking to tie up with Yahoo as a sign the company is increasingly looking for a dramatic move to salvage its business.

Geoff Duncan
Former Digital Trends Contributor
Geoff Duncan writes, programs, edits, plays music, and delights in making software misbehave. He's probably the only member…
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