This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why AOL, Yahoo! Marriage Makes Sense

NEW YORK (TheStreet) -- Maybe the second time for AOL (AOL) will be the charm, and Yahoo! (YHOO - Get Report) will be the charmer.

As anyone with a passing memory of the Internet bubble will recall, AOL's marriage to Time Warner (TWX) became the poster child for overvaluing the commercial potential of the World Wide Web. Back in 2000, the upstart AOL acquired the venerable media conglomerate Time Warner in a transaction valued at more than $160 billion, the largest ever, only to break apart in 2009, amid regrets and bitter recriminations.

But a merger with Yahoo! makes more sense, notes CRT Capital Group analyst Neil Doshi.

AOL's expanding so-called "programmatic" advertising platform, combined with CEO Tim Armstrong's steady share repurchase program and its increasingly attractive valuation make it an enticing takeover target for Yahoo!, which is expected to profit handsomely when half of its 22.6% stake in Alibaba is sold as part of the Chinese Internet portal's public offering slated for the later this year.

"The one big hole in Yahoo!'s advertising platform is on the programmatic side, and that's exactly what AOL has been building," Doshi said in a phone interview. "There's really a compelling case here for Yahoo! to make this deal for strategic reasons, and also because in the next six months it will be flush with a lot of cash and ready to make an acquisition."

Must Read: Jill Abramson Firing Immaterial to Analysts

An AOL-Yahoo! merger would also reunite two former Google executives, Armstrong and Yahoo! CEO Marissa Mayer, both of whom joined founders Sergey Brin and Larry Page in those heady days in the late-1990s when the world's most popular search engine had yet to figure out a way to make money.

Officials for AOL and Yahoo! couldn't be immediately reached for comment.

AOL shares were falling Friday, extending the stock's tumble following its May 7 first-quarter earnings report when shares tumbled 21% on concern that Armstrong is spending too aggressively to expand the company's advertising platforms.

In a conference call following the earnings, AOL said it expected earnings adjusted for some costs to be $500 million in 2014, short of Wall Street analyst expectations for $515 million.

"There continues to be concern around them spending money on their advertising platform, and when it will really, truly become profitable in the way that advertising-focused Internet companies are profitable," said Doshi who has a "buy" rating on AOL. "It's been a gamble but it has paid off."

The advertising industry has changed markedly in just the past two years. Armstrong, a former advertising executive at Google, has invested heavily in computer-driven ad platforms, as it seeks to become a larger player in the transition to digital.

Armstrong announced yet another advertising purchase earlier this month, telling investors that AOL would spend $101 million to buy Convertro, which helps marketers evaluate ad purchases. Money for that acquisition was taken from the company's so-called bank revolver program, a decision that also rankled investors, Doshi said.

Convertro will be joined with AOL's, Ad-Tech and Adap.TV, the online video technology service it acquired last summer for $405 million in cash,making it Armstrong's largest deal since taking over the company's top job in 2009.

AOL was losing 2.6% to $36.53 extending its 2014 decline to 22%. Yahoo was dropping 1.4% to $33.34, extending its loss this year to 18%.

--Leon Lazaroff is TheStreet's deputy managing editor.

>Contact by Email.

Leon Lazaroff is TheStreet's deputy managing editor.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
YHOO $33.16 0.61%
AOL $0.00 0.00%
AAPL $118.45 -0.36%
FB $105.52 -0.21%
GOOG $748.15 -0.02%


Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs