Why AOL, Yahoo! Marriage Makes Sense

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

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.

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