The Five Dumbest Things on Wall Street

Give Liberty AOL or Give It...

Bidding up the price of AOL's dial-up business is a bit like paying millions of bucks for a 59-cent tomato, and a rotten one at that. Still, that didn't seem to stymie Liberty Media Chairman John Malone from becoming a possible acquirer.

AOL gets its cash primarily from two places: Dial-up users' subscriber fees and advertising dollars from its free email and instant messaging services. The advertising business is relatively healthy -- Yahoo (YHOO Quote) and Microsoft (MSFT Quote) were rumored to be interested in getting a piece of AOL's ad action.

But the dial-up dud has been an albatross for Time Warner (TWX Quote), hemorrhaging subscribers and revenue for years. It seemed to have only one logical suitor: Earthlink (ELNK Quote), which derives most of its revenue from dial-up and plans to grow its shrinking subscriber base through partnerships and acquisitions.

The move was widely expected, with Earthlink CEO Rolla Huff telling The Wall Street Journal that AOL's dial-up business is "worth aggressively pursuing." Analysts value the AOL business at up to $3 billion - which would still be a pretty sweet deal, since it's profitable, despite its rapid decline; subscriber revenue has nearly matched the $3 billion mark over the past year.

But now Liberty -- which holds a 2.8% stake in Time Warner -- may make an attempt to land AOL to prop up one of its three tracking stocks.

Time Warner shares have dropped about 5% this year and 15% over the past year, and Liberty Media Capital (LCAPA Quote) investors aren't thrilled with these results. During a conference call Monday, when asked whether Liberty would consider swapping its Time Warner stake for the AOL's dial-up business - similar to Liberty's transaction with News Corp. (NWS Quote) to acquire DirectTV -- Malone gave an affirmative.

"Clearly an exit from the Time Warner equity stake into a cash-generating asset would be attractive," Malone said, noting that no proposal has yet been made.

What Malone didn't mention was that the dial-up business is generating a lot less cash than it used to, has no growth potential and doesn't have many synergies with Liberty's existing assets -- even within the Capital Group, which owns, among other things, the Atlanta Braves and GoPets Ltd.

When posing the question during the call, Citigroup analyst Jason Bazinet also noted that AOL's dial-up business is "declining" and "may not necessarily [have] strategic merits for the rest of the Liberty Enterprise" even if it did make "financial sense in the context of [Liberty Media Capital]."

AOL's ill-fated combination with Time Warner is historic, with its dial-up business revenue plunging more than 60% over the past five years as it shed 18.2 million subscribers. A Pew study shows that America may be online, but it isn't using AOL.

Dial-up is heading toward the same dusty shelf as the 8-track and the VHS tape before it. And while pairing AOL with Earthlink would at least have some logistical sense at the right price, Liberty's potential bid will only spark a bidding war for Time Warner's perennial loser.

One sage suggestion: Leave this tomato in the leftover bin.

-- by Lauren LaCapra

Dumb-o-meter score: 75. America is online, but not with AOL.