Bankers balk at AOLYahoo deal scenario

A decade ago, America Online Inc, as the Goliath of the nascent Internet world, was the protagonist in a bold and ultimately quixotic deal -- its much-hyped merger with Time Warner.

Now as AOL Inc, the shrunken successor to the onetime dialup behemoth, struggles to turn around its business as a standalone company, it is being cited as the protagonist in another transaction that has tech bankers buzzing: a private equity-aided takeover of much larger portal Yahoo Inc.

But there is a key difference. AOL negotiated the all-stock deal with Time Warner from a position of strength. Any Yahoo takeover would be done from a position of weakness. Some bankers and analysts are even calling it a desperation move.

In recent weeks, there has been speculation that AOL is teaming up with several private equity firms to acquire Yahoo. A potential deal, however, would be contingent on Yahoo, the No. 2 U.S. search engine, selling its prized Asian assets which include a 40 percent stake in China's Alibaba.

Several senior tech and media bankers scoffed at the notion of a tie-up between AOL and Yahoo, and suggested that AOL is frantic in finding alternatives for its lackluster business.

"AOL was trying to get Yahoo to buy them a while ago and Yahoo said 'no interest -- you are not even worth it,'" said one banker. "AOL is stirring the pot here a little bit."

The banker said AOL could be publicly implanting the idea in order to start provoking Yahoo's shareholders to agitate the company for a sale. AOL declined to comment.

Any deal would likely be a far cry from the $47.5 billion, or $33 a share, offer that Microsoft Corp made for Yahoo in 2008 and which was rebuffed by Yahoo's co-founder and then-CEO, Jerry Yang, analysts and investors said.

With AOL's market cap close to $2.67 billion, relative to Yahoo's $21.6 billion, the banker said AOL would benefit from having private equity stand behind it in acquiring Yahoo, making it a much "bigger and more relevant company."

But another banker warned that an AOL/private equity deal is "purely an exercise ... testing the waters."

SIGN OF TIMES

Since AOL Chief Executive Tim Armstrong took the helm in early 2009, the company has attempted to reshape itself from a business synonymous with dialup access to a media and entertainment powerhouse.

AOL reported second-quarter total revenue of $584 million, with $297 million from advertising revenue. Yahoo's advertising revenue made up a majority of its $1.6 billion total revenue over the same period.

The combination would lead to a very large content and ad company, which would not necessarily offer meaningful synergies, said Clayton Moran, an analyst at Benchmark Co.

The driving impetus for the combination is not so much to grow scale, but for Armstrong to move to the helm of a combined company.

"There is only one thing that is relevant with AOL and that is Tim Armstrong," said Yun Kim, an analyst at Gleacher & Co.

AOL's contribution to the deal would be only 5 to 10 percent of the combined entity, said Ken Sena, analyst at Evercore Partners.

In addition, it is unlikely that the AOL board would support a transaction that would dilute its equity stake for no premium other than to see Armstrong hold a larger responsibility, Sena said.

Although private equity firms have just started to approach banks for advice on a possible combination, there are no mandates that have been secured, said another banker with knowledge of the situation.

Taking AOL private may also not be feasible given its legacy technology, said a separate banker. Although that person did not discount the scenario, the source said due diligence would give way to private equity firms not finding AOL's business that appealing.

Yahoo, on the other hand, is periodically reviewed by would-be suitors, said another banker.

Microsoft Corp and News Corp would be the main buyers for Yahoo if a process were to kick off, said two of the bankers.

And with Yahoo's search partnership with Microsoft, it is unlikely that Microsoft would let the No. 2 US search engine behind Google Inc fall into the hands of a competitor, said one banker.

"Everybody has run the numbers on how much would it cost to buy Yahoo and sell Alibaba," said one banker, who declined to identify specific parties. Alibaba is not seen as strategic to Yahoo anymore, as the Internet giant focuses on search engine growth, that banker said.

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