Earlier, we laid out the reasons Time Warner (TWX) should sell AOL to Yahoo. Here, we discuss the reasons why Yahoo should buy it. We estimate a fair price for the whole thing (access+advertising) would be about $13-$15 billion. We believe a fair price for the advertising business alone might be $10-$12 billion.
We believe the acquisition would be immediately accretive to Yahoo earnings, especially after cost cuts. See this online spreadsheet, which lays out a back-of-the-envelope look at the impact at a “Low” purchase price of $12 billion and a “High” price of $15 billion, assuming an all-stock deal. In both cases, the transaction would be immediately accretive to Yahoo’s earnings.
- In the “low price for AOL” scenario, Yahoo would end up with 76% of the combined company.
- In the “high price for AOL” scenario, Yahoo would end up with 72%…
The Internet market has become a waltz of elephants, and there is only room for three big generalists. Right now there are four. 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. Yahoo and AOL have almost exactly the same strategy with regard to owned-and-operated properties and third-party ad networks. By combining forces with AOL’s Advertising.com, Tacoda, et al, Yahoo would absolutely dominate the third-party network business. It would also have far stronger owned-and-operated properties than AOL ever will as a standalone. The combination of both would allow it to more effectively become a “must-buy” for advertisers, as well as a desperately desired alternative to Google.
The combined company would have a stronger share of search queries. Yahoo’s search share has been declining, as has AOL’s. It’s true that tying two bricks together won’t make them float, but neither will keeping them separate. More share is good, especially with search algorithm efficiency heavily dependent on volume.
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. .
AOL’s AIM, ICQ, and Yahoo Messenger could all be standardized and made interoperable. This combination would make Yahoo by far the most powerful online communications platform, an area where Google is still weak.
Yahoo could replace AOL’s ghastly email system with Yahoo Mail, bolstering Yahoo Mail’s competitive position. This would save money and customers.
Yahoo could cut a lot of redundant cost (technology, data centres, distribution), which would make the AOL business far more profitable than it is today. This could make the deal less expensive.
Yahoo could cut long-term distribution agreements with 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%. Please see this online spreadsheet for details.
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