Yahoo!/AOL Merger Makes Sense

We believe that AOL provides Yahoo! with an ideal platform to aggressively expand its content offerings and drive its display ad business.
By Trefis ,

NEW YORK (Trefis) -- According to a report from Reuters, AOL (AOL) is actively exploring a breakup involving a complicated series of transactions that may lead to a merger with Yahoo! (YHOO) . We believe that Yahoo! might be interested in AOL's content business, as it would complement Yahoo!'s own content business.

We estimate that AOL's display ad business constitutes around 60% of the

$25 Trefis price estimate for AOL's stock

, which gives us a valuation of around $1.6 billion for the content business alone. As a comparison, Yahoo!'s display business is around 22% of our estimate of almost $26 billion in enterprise value, or around $5.7 billion on a standalone basis. We believe that a marriage of the two could make sense, as we explain below.

Yahoo! and AOL Content Business Merger Makes Strategic Sense

AOL has three main business lines: display ad, search ad and dial-up Internet subscriptions.Yahoo!'s core business is display and search ads, although it has started to focus more on its content business over the last few years. Yahoo! partnered with

Microsoft

(MSFT) - Get Report

on Bing to drive its search technology, which allows Yahoo! to free up its resources from its search business and concentrate its efforts on expanding its content business. Yahoo! may not be interested in AOL's dial-up business since it is a dying business for AOL, and does not provide any synergies to its existing business.Hence, we believe that AOL provides Yahoo! with an ideal platform to aggressively expand its content offerings and drive its display ad business. AOL's strength lies in maps, entertainment news and blogging, which provides an ideal fit for Yahoo! properties related to sports, finance and email. AOL has an average of around 118 million monthly unique visitors as of 2009, and we expect it to increase to 127 million by the end of the Trefis forecast period.

On the other hand, Yahoo! has around 600 million average monthly unique, as of 2009, and we expect this to increase to around 800 million by the end of the Trefis forecast period. Depending on what a combined platform might look like, Yahoo!'s hope would clearly be that with expanded content capabilities from AOL and its search business, Yahoo!'s traffic would increase by much more than the current combined traffic figures, which would boost advertising revenues. This would also help grow the search business, which we estimate is around 25% of Yahoo!'s value.

While it remains difficult to quantify the financial impact of this until we know of a rough structure, we can look at the independent value drivers of the two companies and see that a couple of scenarios could makes sense.

You can see the complete $24.97 Trefis price estimate for

AOL stock here

.

You can see the complete $18.53 Trefis price estimate for

Yahoo! stock here

.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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