Is an AOL-Yahoo deal a good idea?

Combining the two Internet companies could help or wreck them, analysts say

The Internet is abuzz with speculation and Yahoo's stock rose Thursday after reports this week that AOL is looking to scoop up the ailing Web portal.

Citing unnamed sources, the Wall Street Journal reported that AOL and several private-equity firms are showing interest in making an offer to buy Yahoo. While the Journal said AOL might be looking to marry the two Internet companies, there's also speculation that Yahoo could be split up and sold piecemeal.

The discussions, according to the Journal, are so preliminary that they haven't even included Yahoo yet.

AOL declined to comment on the reports, and Yahoo did not respond to requests for comment.

The reports gave a boost to Yahoo's stock. The company's stock price climbed 68 cents a share, or nearly 4.5%, to close at $15.93 after rising as high as $16.76 earlier in the day.

Some industry analysts are wondering what the benefit would be for AOL to buy Yahoo.

AOL has struggled in recent years, after once being a top dog in the Internet community, and Yahoo has also seen better days. Yahoo's stock price dropped 50% between 2006 and today, according to Dan Olds, an analyst at Gabriel Consulting Group.

Yahoo, however, has been back in the news on a positive note this year. The company, which remains in a distant second place behind Google in the search market, struck a deal in August with Microsoft, whose Bing search engine is No. 3 in the search market. Aiming to take to take on first-place Google, Yahoo tossed aside its own search technology and now offers Bing-powered searches.

AOL has recently been buying up online media sites in a bid to boost the digital content it offers customers. Earlier this month, it acquired TechCrunch, a technology news blog, and AOL Chief Technology Officer Alexander Gounares said the company might be buying more content sites. AOL also operates the Patch community news sites and owns Engadget, a Web magazine focusing on consumer electronics.

But the question remains: How could pairing up AOL and Yahoo help either company? Olds said he's not sure.

"Putting AOL and Yahoo together is like tying two rocks together to make one of them float," Olds said. "Besides, isn't there some statute of limitations on disastrous mergers? AOL's merger with Time-Warner is still being used as a case study on bad mergers in business schools and as a cautionary tale that parents tell their burgeoning entrepreneurial kids at bedtime."

Olds also noted that a prospective buyer might get the most value out of Yahoo by breaking it apart and selling it off in chunks.

"I think that this is what is attracting the private equity guys. They see dollar signs in the break-up process and management fees they might be able to snag," he said. "What I don't see is their plan for making Yahoo more relevant and profitable."

Ezra Gottheil, an analyst at Technology Business Research, said he could see something positive come out of the potential deal.

"They both have shed their old, heavy cost structures," Gottheil said. "They both still have a viable social network.... The businesses are similar. The technology requirements are similar. The companies are facing similar challenges. If they streamline further and leverage interest in social networks, there are possibilities, but it will take work."

The question also arises as to whether Yahoo would welcome such an offer. Olds said Yahoo would have to at least consider the offer at this point.

"I think Yahoo will be exploring it -- and all possibilities," he said. "That's one of the catches that comes from being a public company. Because their stock is public, they have a fiduciary duty to investigate anything that could credibly increase shareholder value. If they don't, then it's kind of like management malpractice."

Gottheil added that Yahoo should show some interest. "I think there are synergies," he said.

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, or subscribe to Sharon's RSS feed . Her e-mail address is sgaudin@computerworld.com.

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