You will be redirected back to your article in seconds

Should Yahoo and AOL Merge? Such a Deal Is ‘Rife with Risk,’ Analysts Say

An activist investment firm has urged Yahoo to consider merging with AOL — claiming the combination could produce $1 billion of cost synergies — but several Wall Street analysts say such a tie-up likely doesn’t make sense.

On Friday, Starboard Value released a letter it sent to Yahoo CEO Marissa Mayer, with a series of proposals for “unlocking the tremendous value” of the company for shareholders. Among those was for Yahoo to return cash with a minimal tax hit to investors from its minority equity stakes in Alibaba Group — which launched what turned out to be the largest IPO in history earlier this month — and its Yahoo Japan partnership.

In addition, Starboard urged Yahoo to halt its M&A strategy, with the exception of exploring a merger with AOL to gain scale and improve its competitive position. Yahoo has said it’s reviewing the Starboard letter; this summer, a top Yahoo exec said it isn’t interested in buying AOL.

So would a Yahoo merger with AOL, which has been a recurring rumor over the last few years, be a smart move? Such a deal “is rife with risk for Yahoo and its shareholders,” Bernstein Research analysts Carlos Kirjner and Peter Paskhaver wrote in a note to investors Monday.

“We think acquiring AOL is a very good idea in theory and likely a very bad idea in practice,” the analysts wrote, particularly if Yahoo paid a premium for AOL.

SEE ALSO: What Yahoo Should Do with Billions from Alibaba IPO: Invest in Video, Ad Tech

On paper, Yahoo-AOL may look attractive: It would give the combined Internet media companies a larger set of eyeballs against which to serve ads, as well as bring AOL’s lead in video to Yahoo, which has trailed the sector. “(W)e believe a merger of AOL and Yahoo’s core business may be one may be one of the best ways to both fully seize the cost-reduction opportunity and also to tax efficiently monetize Yahoo’s non-core equity holdings,” saving an estimated $16 billion in tax expense, Starboard said in its letter.

Yahoo’s current stake of 15% in Alibaba is worth $34.6 billion, and Yahoo “has been searching for ways to tax-efficiently sell its shares in BABA post lockup (roughly a year from now),” Cowen & Co. analysts John Blackledge and Thomas Champion wrote in a note.

A merger with AOL might be a way to do that, but there’s no guarantee Yahoo can realize those tax savings, according to analysts. And, in the absence of tax relief for Yahoo’s sale of the rest of its Alibaba stake, any benefits of a Yahoo-AOL combo “outweigh the absence of growth (topline) and any cultural issues of combining two iconic web 1.0 entities,” the Cowen analysts said.

A major difficulty would lie in the details of merging Yahoo’s 12,200 employees and AOL’s roughly 5,100 workforce “with different cultures, assets, processes, issues and history,” Bernstein’s Kirjner and Paskhaver noted. They added, “The tech and non-tech worlds are full of mergers between large companies that have destroyed tremendous value.”

Meanwhile, AOL CEO Tim Armstrong on Monday downplayed the prospect of a merger with Yahoo, saying “I haven’t focused too much on Yahoo-Starboard,” in an interview with CNBC.

“The reality is, AOL has tremendous scale and has actually been moving up the scale rank,” Armstrong said. “So we’re manifest destiny and really focused on only what we are doing, our strategy.” He cited an announcement from AOL and Publicis Groupe Monday, under which they will expand their six-year pact to extend to “programmatic” ad buying on digital and linear TV.

With the Alibaba IPO, Yahoo was set to net more than $8.3 billion in cash and has pledged to return at least half of the post-tax IPO proceeds to shareholders. Even after that, Yahoo would have a substantial stockpile, on top of its cash and cash equivalents of $4.3 billion held as of June 30, to make strategic acquisitions.

For Yahoo, ad technology and video content are two areas it clearly needs to focus on, according to analysts. But don’t expect Yahoo to execute any large M&A deals of $1 billion more in the near term, Rosenblatt Securities analyst Martin Pyykkonen wrote in a research note earlier this month.

The biggest M&A deal so far under Mayer was the $1.1 billion purchase of blogging site Tumblr in May 2013 — so far with little revenue to show for it. If Yahoo executed deals in the $200 million to $400 million range that “would be perfectly OK, but another large, billion-plus acquisition probably should wait until there is more certainty by management that it can make Tumblr successful,” Kirjner and Paskhaver wrote.

Yahoo shares closed down 0.3% Monday, to $40.52 per share (and off a $42.88 per share peak closing price Sept. 12, one week ahead of the Alibaba IPO). AOL shares also closed down 0.3%, to $44.40 per share on Monday.

More Digital

  • Nancy Pelosi

    Facebook on Defensive Over Fake Pelosi Video

    Facebook faced growing criticism this week over its decision not to remove a video that was doctored to suggest that House Speaker Nancy Pelosi was intoxicated during a recent public event. The video, which has been viewed more than 2.5 million times, had been slowed down notably, giving the impression that Pelosi was slurring her [...]

  • Little-Black-Mirror-Maia-Mitchell

    Netflix Launching 'Little Black Mirror' Video Series Starring Maia Mitchell, Lele Pons, Rudy Mancuso, Juanpa Zurita and More

    To promote next month’s premiere of “Black Mirror” season 5, Netflix is launching a short video series — “Little Black Mirror,” with a cast that includes an ensemble of Latinx social-media stars. The three “mini-stories,” aimed at Spanish-speaking audiences, are inspired by the tech-dystopian universe of Charlie Brooker and Annabel Jones’ anthology series. “Little Black [...]

  • Twitter

    Twitter Permanently Bans Anti-Trump Krassenstein Brothers, Who Deny They Broke Platform's Rules

    Twitter permanently suspended the accounts of Ed and Brian Krassenstein — progressive political activists famous for trolling Donald Trump and his supporters — with the company alleging the brothers used bogus accounts to amplify their reach on the platform. “The Twitter Rules apply to everyone,” a Twitter rep said in a statement. “Operating multiple fake [...]

  • Snapchat

    Snap in Talks to License Music to Let Snapchat Users Embed Songs in Posts

    Snap wants to up Snapchat’s music game. The company has been in negotiations with music companies including the big three — Sony Music Entertainment, Universal Music Group and Warner Music Group — to license song catalogs for the Snapchat app, according to two industry sources familiar with the talks, confirming a Wall Street Journal report. [...]

  • T-mobile - Netflix - John Legere

    T-Mobile Passes Netflix Price Hike Through to Subscribers

    T-Mobile is getting ready to raise prices for subscribers who have taken advantage of its “Netflix On Us” promotion: The mobile carrier will begin charging existing customers who have participated in the promotion an additional $2 per month to account for Netflix’s recent price increase. Consumers will see their bill go up starting on 6/2. [...]

  • Oona King

    Snap Hires Google Exec Oona King as First VP of Diversity and Inclusion

    Snap continues to fill out the ranks of its revamped leadership team: The Snapchat parent tapped Oona King, most recently Google’s director of diversity strategy and a former member of British Parliament with the Labour Party, as its first VP of diversity and inclusion. King, who starts at Snap on June 11, is also the [...]

More From Our Brands

Access exclusive content