The latest report on the Yahoo-AOL deal is that Yahoo will buy AOL’s ad network and content businesses for about $8 billion. We suggested yesterday that this price was “expensive but not ridiculous”–provided that Yahoo drastically cuts costs in the integration. We stand by that assessment. And now, we’re going to provide some M&A advice to Yahoo: Don’t do it.
“Expensive but not ridiculous” is not a good reason to do a deal when you don’t have to, Yahoo. Time Warner needs this deal more than you do: Believe it or not, their asset, AOL, is deteriorating even faster than you are. So time is on your side.
Given that you are still growing, moreover, and AOL is not (on the contrary…), you should not pay any more for AOL than the market is paying for you. In fact, given that AOL is no longer a cohesive company but just a big bag of quasi-related businesses, you should pay less. So let’s review:
Right now, the market is paying about 3X revenue (trailing) for you. If you buy AOL’s ad network and content businesses for $8 billion, you will be paying almost 4X (trailing quarter annualized). You should not therefore pay a dime more than 3X, which would be about $6 billion.
Second, please don’t buy AOL unless you’re serious about firing at least 4,000 people–not just from AOL, from Yahoo. As you know, when we performed your “getting Yahoo fit” analysis for you, we concluded that you needed to fire 3,000 people. If you buy AOL, there will be a lot more redundancy to eliminate, so we think 4,000 is probably a fair number to aim for.
Jerry, we secretly suspect that you are far too nice a guy to fire 4,000 people. Kara Swisher (?) has suggested that you order AOL’s Ron Grant to do the hatchet work for you, which is a fine idea. But Ron would have to cut into Yahoo flesh, too, and we just don’t see you giving him the order to do that.
So the answer is: Don’t buy AOL, Jerry. Don’t buy AOL unless Jeff Bewkes is willing to sell it to you for $6 billion and you can look yourself in the mirror and say, “I, Jerry Yang, will fire 4,000 people.” Because if you can’t do both of those things, this deal is going to be a disaster.