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The Times of London reports that amongst the options Yahoo is considering in the wake of rejecting Microsoft’s $44.6 billion takeover offer is a merger with AOL. According to the report, Yahoo is unwilling to accept a Microsoft offer under $40 per share – approximately a $12 billion premium to the original offer Microsoft made to acquire Yahoo.
While there are a lot of obvious synergies with AOL such as email, instant messaging, and display advertising, it would seem nearly impossible for Yahoo to convince shareholders that an AOL merger is a better option than Microsoft’s $31 per share cash and stock deal.
[img src="" caption="" credit="" alt=""]As we noted last week, Time Warner is in the process of splitting AOL into two companies – dial-up access and content and advertising. When Google invested in AOL in late 2005, the whole company was valued at $20 billion. The access business has continued an aggressive slide since then, while the content and advertising business has grown largely through acquisitions. Presumably, Yahoo would be interested in only the content and advertising business, which, despite having a few nice assets (AIM, Advertising.com, Userplane, etc.), is likely worth only a fraction of the value of Yahoo, even pre-Microsoft bid.
In turn, it’s very hard to see how a combination of Yahoo and AOL creates value for shareholders that comes close to that of the Microsoft bid. Versus accepting a 60 percent premium from Microsoft, Yahoo and Time Warner shareholders would be receiving shares of the combined company. Thus, while the combined company has more total assets than the two companies would independently, there would be more shares outstanding, which means there is zero value created in the short-term. In fact, in such a scenario you might expect to see Yahoo shares fall below pre-Microsoft bid levels, since it would mean that the Microsoft bid is no longer being considered.