Word got out overnight that Yahoo! (YHOO) is at the bargaining table with Time Warner (TWX) about AOL being merged into the larger portal. Yahoo! is grasping at every straw to stop a takeover by Microsoft (MSFT).
Unfortunately, an AOL deal makes no sense. AOL and Yahoo! are both in the online display advertising business. Revenue from this source is not growing quickly at either company. Yahoo! has about 22% of the US search market, which had been a faster growing ad environment. AOL has 5%. Google (GOOG) has 60% and Microsoft about 10%.
Putting together two slow-growing companies might allow for some cost cutting, but it would come mostly from personnel. In a Microsoft buy-out, a number of costs for redundant search technologies can be taken out. Microsoft can also use Yahoo!’s huge user base to sell its online software products.
Microsoft has the technology and capital to have a chance of making a combined internet operation work. It also has a $31 offer on the table. Putting Yahoo! and AOL together does not do much for either company beyond creating a larger display ad platform.
If Yahoo! walks away from Microsoft, there is no reason for its shares not to drop back below $20.
Douglas A. McIntyre
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