Activist investor Starboard sent a letter to Yahoo this morning urging Yahoo management to improve shareholder value by, among other things, unlocking the value of its Asian assets tax-efficiently, cutting costs, stopping certain kinds of acquisitions, and exploring a “strategic combination” with AOL.
That has all been reported.
What has not been reported is that the “strategic combination” with AOL would not likely be Yahoo buying AOL, as most reports have assumed.
Rather, to aid in the tax-efficient monetization of Yahoo’s Asian assets, the combination would likely be AOL buying Yahoo, with AOL, not Yahoo, likely being the surviving entity.
Here’s the relevant paragraph:
[W]e believe a merger of AOL and Yahoo’s core business may be one of the best ways to both fully seize the cost reduction opportunity and also to tax efficiently monetise Yahoo’s non-core equity holdings. We trust the Board and management will do the right thing for shareholders, even if this may mean accepting AOL as the surviving entity in a combination, should that be the best and most tax efficient structure. (Emphasis ours.)
The transaction Starboard is likely describing is some form of what is known as a “cash-rich split-off,” which is a technique that can be used to unlock valuable assets without having to pay capital gains on them. The rules for cash-rich split-offs are mind-numbingly complicated (I have detailed them here), but in this case it would likely involve a cash-enriched AOL buying Yahoo, not the other way around.
Starboard already knows AOL and AOL’s management well, having taken an activist position in AOL a couple of years back, so it is in a good position to help facilitate a transaction like this.
One interesting question if a deal like this were ever to happen would be who would be in charge of the combined entity: Yahoo and Yahoo’s CEO, the former Googler Marissa Mayer? Or AOL and AOL’s CEO, the former Googler, Tim Armstrong?
Either way, as Starboard suggests, combining the two companies would indeed make sense strategically. Scale helps in the digital-media, distribution, and communication business, and the combined AOL-Yahoo would have massive scale.
DISCLOSURE: I work for Yahoo as a host of a Yahoo Finance video show. I am a Yahoo shareholder (since 1998). I know Yahoo’s CEO Marissa Mayer. I know people at Yahoo and on Yahoo’s board. I know Yahoo investors. I am also an AOL shareholder (since 1997.) I know AOL’s CEO Tim Armstrong and other people at AOL. I know AOL investors and board members. Yahoo and Business Insider have a business relationship, which is great for both companies. AOL and Business Insider have a business relationship, which is great for both companies. I like the people I have mentioned above personally and would not like to say or do things that would make them mad at me. I also have relationships with dozens of other folks that might create conflicts of one sort or another when I write about this topic. So, basically, I’m conflicted out the wazoo.