December 6, 2010

Rumor: AOL Looking For Yahoo Merger

News agency Reuters reported on Monday that AOL Inc. is actively exploring a breakup of the company in a complicated series of transactions that may lead to a merger with Yahoo Inc.

People close to the situation told Reuters that AOL has not yet made a formal proposal to Yahoo.

The most recent discussions derive from plans contemplated in 2008 and 2009 before Time Warner and AOL split.

The media conglomerate during that time had explored the option of breaking apart AOL's two main businesses.  Reuters reported that the legacy dial-up Internet service would have been spun off or sold to EarthLink or United Online, while the display advertising business would have been merged into Yahoo.

AOL has continued to seek a breakup and other options since the December 2009 split off from Time Warner.

"You can drive the pieces into people's hands that could pay top dollar for them and create value, or spin them off," said one of Reuters' sources.

Analysts believe that Yahoo will generate $1.64 billion in earnings before interest, tax, depreciation and amortization this year. 

AOL is still holding tight to its dial-up business, which remains a major source of revenue for its 4 million customers that contribute to the company's home page traffic. 

"The issue is Yahoo has no interest in dial-up, and with the traffic flow between (AOL's two) businesses, it is not easy to sever," said one of the sources.  However, Reuters reported that AOL's further investment in display advertising appears to be an attractive maneuver to Yahoo.


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