Google Does Web Another Favor

Either way, the transaction isn't prompting a broad re-evaluation of Time Warner's worth. News of the possible deal only moved the needle slightly last week. Time Warner shares lost a nickel on Monday.

Jessica Reif Cohen, the Merrill Lynch analyst covering Time Warner, values AOL at about $20 billion based on 2006 estimates. Goldman's Noto has previously said, "Time Warner's valuation already had an implied value of $16 billion to $20 billion for AOL." He also points out that "investors might not want to give Time Warner credit for a full $20 billion given only 5% of the asset might be sold at that amount."

AOL, at the heart of what some consider the most dubious merger in the nation's history, got a lift this summer when it orchestrated a strategic relaunch and positioning. Investors, once burned and twice shy, bought the massive problem-solving exercise even as the service shed dial-up customers by the thousands. The competition took notice and now AOL is somewhat of a darling again, given the increased appetite advertisers have for online spends, video services and other offerings.

Merrill's Cohen says that, "While we suggested that selling equity in AOL at current valuations would be a mistake, the small size of the deal (only 5% of AOL and just over 1% of Time Warner's market cap) makes it relatively insignificant from a financial perspective." Reif Cohen believes that the real key is whether the deal will drive operational and financial performance at AOL. She says details of the agreement seem to satisfy the key requirements: securing a long-term technology partner, driving additional traffic to AOL.com and improving the monetization of its current traffic through improved sales.

The Google deal would allow AOL-branded ads on Google and provide search capabilities that Google excels at. Because a heady 2006 online-ad environment seems likely, both firms could prosper significantly from the enhanced joint venture that would see Google provide a boatload of ad inventory to AOL and its affiliates.

It may not prove to go the whole nine yards for Icahn and other parties involved, but at face value it seems like a step forward.

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