Yahoo About To Overpay For AOL (TWX)?

Yahoo and AOL could announce their merger deal this week month, TechCrunch says. The terms?

  • Yahoo swallows AOL’s content and ad network businesses (but not the access business)
  • Time Warner throws in “a couple billion” of cash
  • Time Warner ends up with one-third of the combined company.

Fine. Assuming that’s correct, how much is Yahoo paying for what’s left of AOL? $8 billion.

How do we get there?

At $15, Yahoo’s market cap is about $20 billion. If Time Warner ends up with a third of the company, the combined market cap would be $30 billion. If Time Warner throws in $2 billion of cash, that would leave an implied value of $8 billion for AOL.

Is that fair? It’s expensive, but not ridiculous. Especially if Yahoo does what it absolutely must do if it does this deal, which is aggressively integrate the two companies–firing several thousand people in the process.

AOL generated $530 million of ad revenue in Q2, for an annual run-rate of about $2 billion. About half of this revenue is from low-margin third-party advertising revenue, so it’s also worth looking at revenue excluding TAC (traffic acquisition costs), which was $278 million ($1 billion run-rate).

An $8 billion purchase price would be about 4X total ad revenue and 8X net ad revenue. 8X is expensive, especially for a company that isn’t growing now and probably will have a tough time growing again. But if Yahoo is committed to massively cutting costs and eliminating redundancy, it’s not outrageous.  The devil will be in the details.

See Also:
Dear Yahoo: Please Don’t Blow the AOL Deal
Why Yahoo Should Buy AOL
Yahoo Buying AOL: The Hurdles

 

 

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