AOL/Yahoo Talk, Jet Engine Divorce: Deals to Watch

NEW YORK ( TheStreet) -- AOL ( AOL) CEO Tim Armstrong has been meeting with top shareholders to push the idea of a sale to Yahoo! ( YHOO), according to reports from Reuters that cite sources with knowledge of the discussions.

Armstrong is trying to build shareholder support for a deal with Yahoo!, a merger as an alternative to being a standalone company, Reuters said. A merger of AOL and Yahoo! could wring out $1 billion to $1.5 billion in cost savings by providing synergies between data centers and news sites, according to a major shareholder who met with Armstrong, the report added.

New York -based AOL, which reported an $11.8 million loss in its most recent quarter, has seen its shares fall over 40% year to date. Meanwhile Yahoo shares are down nearly 6% this year. On the news this morning, AOL shares rose over 3% to $13.58 and Yahoo fell slightly to $15.64 in early trading.

Armstrong left Google in 2009 to help rebuild the dial up internet service provider and online content company, which first brought the internet to many in the 1990s.

Both Yahoo and AOL are struggling to generate ad display revenue in the face of competitive pressure from the likes of Google ( GOOG) and Facebook.

Yahoo! has been undergoing its own strategic review since CEO Carol Bartz was fired in September. The company and its advisers have started considering Yahoo!'s options, including a possible sale of the entire company, a spin of its Asian assets or a management takeover. Deal rumors have included company management, owners of partnerships

On Sept. 9, Bloomberg reported Armstrong was in talks with private equity firms and investment bank Allen & assess a merger with Yahoo after it fired its CEO Carol Bartz. According to the report, Yahoo!, with a market cap of roughly $20 billion would buy smaller AOL with a market cap of $1.45 billion and leave its CEO Tim Armstrong on to run the combined media, search and dial up Internet conglomerate.

In late September, Yahoo said in a letter to employees that it's hired Allen & Co. as an adviser on a strategic review of the company to maximize shareholder value.

In the letter, Yahoo co-founders Yang and David Filo and Chairman Roy Bostock wrote to employees that, "What Yahoo! needs to do better -- and we've talked about this -- is accelerate innovation, reignite inspiration, and give our users what they want now -- great content that is engaging and easy-to-use on any device and provides an experience in which they can participate and contribute. Perhaps most importantly, we need to anticipate what they will want next. That is the path to enhancing the value of Yahoo! for all of its stakeholders."

It's to be seen whether Yang, Filo and Bostock see an AOL takeover as the boost in web content to propel its existing businesses, which contain second leading search business and most viewed webpages in the U.S.

United Technologies' ( UTX) jet engine division Pratt & Whitney is set to buyout a $1.5 billion joint venture with Rolls-Royce, ending a troubled partnership and setting the stage for future collaboration.

Under the agreement, Rolls-Royce is going to sell its shares in IAE International Aero Engines to Pratt & Whitney for $1.5 billion, along with a 15-year revenue sharing program based on the hours flown on the V2500 jet engines the partnership produces.

Pratt & Whitney and Rolls-Royce also announced they are beginning a new joint venture to make mid-sized 120-230 passenger plane engines to replace the existing fleet. Each company will hold a 50% stake in the partnership. The partners expect that over the next 20 years, 20,000 mid-sized jet engines will need to be replaced.

The Hartford, Connecticut -based jet engine division of United Technologies also said it would look to sell some of the shares in IAE its acquired from British-based Rolls Royce to other partners in the venture like German -based MTU Aero Engines and Japan -based Japanese Aero Engines.

The IAE venture was created nearly 30 years ago and has produced approximately 4,500 V2500 engines and has an additional 2,000 on order. The engines are used in the Airbus320 family of airplanes.

Signaling the British and U.S. aircraft engine giants have brushed off previous legal bouts stemming from their IAE partnership, Mark King of Rolls-Royce said, "Today's announcement charts a clear course for the future of Rolls-Royce in the important mid-size aircraft segment," in a release announcing the deal.

After preparing investors for the worst quarterly revenue result at its investment bank since the depths of the financial crisis, JPMorgan Chase's ( JPM) investment banking unit did better than expected.

The unit earned $6.37 billion in revenue and $1.64 billion in profits during the third quarter. Its trading division drove investment banking results, posting revenue gains that countered estimates tied to drop in trading and deal making environment that snowballed as the third quarter wore on.

JPMorgan reported Thursday that third quarter profit was $1.02 to a share on revenue of $24.4 billion, beating estimates of 91 cents a share and revenue of $23.40 according to Thomson Reuters.

The earnings beat; however was a result of by a $1.9 billion debt revaluation gain -earnings that are not related to the underlying operations of the investment bank. In its press release announcing earnings, JPMorgan said, "the DVA gain reflects an adjustment for the widening of the Firm's credit spreads which could reverse in future periods and does not relate to the underlying operations of the company." According to a Barclays report, JPMorgan's CDS spreads nearly doubled from 83-to-162bps this quarter.

Its investment bank would have posted a loss without the debt-valuation adjustment that added 29 cents a share to earnings. Of the investment bank earnings, JPMorgan CEO Jamie Dimon said in a press release, "The Investment Bank's revenue, excluding the DVA gain, was down substantially; however, we are gratified that the business maintained its #1 ranking in Global Investment Banking Fees."

Net income from JPMorgan's investment banking operations dropped 20% to $1.64 billion from $2.05 billion in the second quarter of 2011. The result was better than the third quarter results a year ago, when the investment banking unit brought in a profit of $1.29 billion.

Revenue at the investment bank fell 13%, to $6.37 billion from $7.31 billion in the second quarter, beating company forecasts. It was also more than revenue of $5.35 billion this time a year ago. The beat was attributed to its fixed income and equity trading businesses.

Expectations were for JPMorgan to earn $1 billion in investment banking fees and roughly $3.77 billion in trading revenue, making overall investment banking revenue forecasts of roughly $4.8 billion the weakest quarterly figure since the 2008 financial crisis when the bank reported an overall loss in the fourth. Without the debt revaluation gain, JPMorgan's underlying investment bank revenue of $4.48 billion was slightly lower than pessimistic estimates.

Investment banking fee revenue fell 46% to $1.04 billion, after growing 23% and 37% in the first and second quarters respectively when compared with 2010. In the second quarter, the investment bank posted its best quarter since earning $2.24 billion in that period two years prior. According to Dealogic, global investment banking revenue was $13.5 billion in the third quarter, the lowest level since the first quarter of 2009 and down nearly 40% from second quarter levels of $21.4 billion. The third quarter results still showed that JPMorgan led all banks in investment banking fees, taking an 8.4% overall market share. Results showed that through the first 9 months of the year, it led all banks in fees earned from debt issuance and was second in equity capital market, M&A and Loans fees earned.

Total fixed income, currency, and commodity trading revenue fell to $3.33 billion below $4.28 billion earned in the prior quarter -but more than $3.12 billion this time last year. Meanwhile, equity trading increased to $1.42 billion from $1.22 billion in the second quarter and $1.14 billion at this point in 2010. Overall FICC trading revenue is up 6% and equity trading is up 11% 9 months into the year, when compared to 2010.

JPMorgan's shaky investment banking earnings numbers may be a harbinger of things to come as Morgan Stanley ( MS), Goldman Sachs ( GS), Citigroup ( C) and Bank of America ( BAC) all report earnings in coming weeks.

If debt revaluation gains based on gains related to widening bank credit spreads are readjusted to losses, management and analyst pessimism for investment banking revenue may be realized in coming quarters.

-- Written by Antoine Gara in New York

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