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Wednesday, October 11, 2006

Yahoo! Should Buy AOL (YHOO)(TWX)

AOL has never worked quite right for Time Warner. The merger of the two companies is seen as the cause of the drop in TWX stock, and its lack of ability to recover from its drop from $91 where it traded over six years ago. AOL is taking a large risk by trying to migrate from a subscriber based revenue model to one driven by ad revenue.

It is hard to say what AOL is worth. But with Time Warner's market cap at $77 million and AOL representing about 20% of revenue, the company might fetch $15 billion, depending on how whether any of Time Warner's debt is involved. Since AOL is in a transition, TWX might even sell the company for less.

Yahoo!'s market cap stands at $34 billion. It might have to give up a third of its shares to get AOL, but it may be worth it. Yahoo! is troubled on a number of fronts. Its new search technology is late, and the company is seen as dropping further behind Google every day.

NielsenNetratings says that Yahoo! still has the largest audience of unique users in the US. In August, it was almost 107 million. AOL was at just under 75 million. Google stood at 87 million and it new acquisition, YouTube, was at 34 million. Giant social site MySpace had a count of 49 million.

A combined AOL/Yahoo! would have a unique audience of as much as 180 million viewers. There may be some duplication that would bring that down, but it would still be the largest web company by far. The combined company would have revenue of about $15 billion to Google's $10 billion.

The savings in a combined operation would also probably be considerable. Technology, management, and sales departments could be streamlined.

Although both company's face formidable problems of their own, their combined portal, e-mail, and instant messaging platforms would be unchallenged in size.

Time Warner doesn't really want AOL. A large stack in Yahoo! might be of more value. And, Yahoo! has to demonstrate that it can make a deal to transform the company.

Where are the investment bankers when you need them?

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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