Time Warner (TWX) Should Sell AOL To Yahoo (YHOO)

In the first installments of our How to Fix AOL series, we discussed boosting morale and reorganising the content business.  AOLers then weighed in with many suggestions of their own.  In this next instalment , we urge Time Warner CEO Jeff Bewkes to sell the company to Yahoo for $13-$15 billion. Here’s why:

The Internet market has become a waltz of elephants, and there is only room for three big generalist players.  Mature markets usually support three big generalists, not four.  Microsoft, Yahoo, and AOL simply have to combine forces, or Yahoo will remain under pressure and AOL or Microsoft will die (if Microsoft’s Internet division were a stand-alone business, it would already be dead).  The combination of AOL and Yahoo makes the most sense…

The combination would bolster Yahoo’s domestic market position, especially in ad networks and display advertising.  This would allow it to more effectively become a “must-buy” for advertisers, as well as a desperately desired alternative to Google.

AOL’s stand-alone brands–TMZ, Mapquest, Truveo, etc.–would fit will within the Yahoo empire and could be further leveraged though Yahoo’s global distribution platform.  If AOL remains stand-alone, meanwhile, it will have to build it’s own platform.

AOL’s AIM, ICQ, and Yahoo Messenger could all be standardized and made interoperable

AOL could replace its ghastly email system with Yahoo Mail, bolstering Yahoo Mail’s competitive position.

AOL could abandon its new international portal strategy, which is currently a long shot.

AOL could cut a lot of redundant cost
(technology, data centres, distribution) and be owned and managed by a company that will derive many strategic benefits from owning it.

The deal could involve long-term distribution agreements for other Time Warner content properties, which would benefit both sides.


We estimate that AOL’s advertising business (portal and platform) is worth about $10-$12 billion.  We estimate that the access piece–which Yahoo could buy and then sell or keep–is worth about $2-$3 billion ($2.5 billion in revenue probably going to about $1.5 billion, estimated EBITDA of about $1 billion going to perhaps $500 million).  This suggests that a fair price for the whole kit and kaboodle is about $13-$15 billion.

Yahoo currently has about a $40 billion market cap.  A stock deal would produce a combined company worth about $50-$55 billion, with Time Warner shareholders owning about 25%.  Here’s an online spreadsheet that provides a back-of-the-envelope look at the transaction.  And here’s a look at the transaction from Yahoo’s perspective.

See Also
Why Yahoo Should Buy AOL (Companion Piece)
AOLers on How to Fix AOL
Some AOL Properties are Actually Strong
How to Fix AOL 1: Boost Morale
How To Fix AOL 2: Appoint One Content Head Instead of Three

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