The REAL Reason AOL-Yahoo, Or Any Merger Ever, Makes Sense

MergerLet’s have a merger!

Most mergers are a bad idea.In 2008, the New Yorker’s economics writer James Surowieki wrote that one study of 700 mergers revealed that only 17% “created real value.” More than half “destroyed” it. Another study found that under 25% of 1990s-era mergers “generated excess returns on investment.”

When mergers DO make sense, it’s usually for one reason: the two companies make the same product and merging creates one company with the market share of two and, after reducing redundancies, the costs of less than two.

We think this kind of merger will eventually happen between Yahoo and AOL, which are both turning into media companies that could benefit from increased scale and reduced overhead.

We’ve created a series of illustrations to demonstrate this simple, but powerful concept →

Here are two single-factory companies and their costs per employee. Note that the finance guy at company one has figure out a way to do the job of two people.

Here's how much each employee contributes to revenues. The sales guy at company one can't keep up with his rival.

The total value created by the two companies for their owners is $500,000 per year.

Clearly, that's not enough value. Let's have a merger!

Time to cut overhead. Who should we can?

Time to cut overhead. Who should we can? Let's keep the finance guy at company one, keep company one's lawyer (he's doing the deal) and keep ALL of the content producers. Let's can the inefficient finance people at company two and company one's under-performing sales guy.

We've got a new total value created each year of $800,000!

That's a $300,000 increase for the shareholders of the combined companies. Good merger!

But who will run this new company?

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