Why it makes sense for Yahoo to merge with AOL

BGC Partners director of research Colin Gillis explains why it makes sense for Yahoo to merge with AOL, and weighs in on BlackBerry Passport.

Activist Investor Starboard Urges Yahoo to Combine with AOL

By Features FOXBusiness

Yahoo (YHOO), an early investor in Alibaba (BABA), sold part of its stake in the Chinese e-commerce giant's record-breaking IPO last week. The sale reduced Yahoo's ownership share from 22% to 16% and, pre-tax, netted the company $9.5 billion, giving the search giant new capital to play with.

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Despite being one of the pioneering Internet brands, Yahoo has floundered in recent years. Though the stock has seen a significant boost in the two years Marissa Mayer has been at the helm, the gains have largely been due to the Alibaba investment, while Yahoo’s core advertising business has struggled.

As one of the most active acquirers in technology, investors will be watching to see how Mayer spends the new flood of capital. Some speculate this will determine whether or not she gets to keep her job.

One frequently floated idea is for Yahoo to combine forces with AOL (AOL), because the companies have significant overlap between their services. AOL’s market value is just $3.5 billion, making it an affordable investment for Yahoo.

Adding fuel to the fire, on Friday, activist hedge fund Starboard, a Yahoo shareholder, sent a letter to Mayer, urging her to consider a merger with AOL. Starboard also recommends the company sell its remaining stakes in Alibaba and Yahoo Japan.

“AOL fits right into Yahoo’s business. It is content. Marissa is moving Yahoo towards the native advertising business model and away from display,” Estimize CEO Leigh Drogen told FOX Business in a televised interview.

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But others suggest pairing two “old” Internet companies together would do little to help its reputation. As it is, Yahoo has trouble attracting new talent in Silicon Valley. Yahoo has struggled to attract top engineering talent, due to its reputation as a "has been" tech company.

“People don’t look at it as a place they’re proud to work at,” says Sam Hamadeh, CEO of private capital research firm, Privco.

Adding to that sentiment,  Kinshuk Jerath, associate professor of business at Columbia Business School, said Yahoo remains an outdated concept that was once useful when people didn't fully understand how the web worked, or how to use it. He added the company should focus on understand what it needs to specialize in, and then become really good at that.

Hamadeh said Yahoo is not in a position to do a game-changing acquisition because it already tried that to do the same kind of thing with Tumblr and it did not turn out well. After it was purchased for $1.1 billion, Tumblr has failed to meet growth expectations.

“Marissa doesn’t have a long leash to do whatever she wants. Pinterest would be an obvious move for $5 or $6 billion, but it’s not going to happen.” 

Instead, Hamadeh suggests that Mayer look at mid-sized deals like BuzzFeed and AppNexus to help with ad revenue.

Peter Csathy, CEO of Manatt Digital Media, suggests that Yahoo makes another bid for Hulu. He said the move would help the company signficiantly increase its efforts in the orginal-programming space to help it better differentiate itself from YouTube.  “

Another possible acquisition idea, Drogen said he could see Yahoo making a play for Reddit or Yelp. 

“Reddit’s cheap. They could do native advertising on Reddit. It is really the front page of the Internet," he said.

Still, there’s the whole question of whether Alibaba will buy back Yahoo altogether. Drogen said if it happens, it would be an opportunity for Alibaba to get a sigificant portion of its stock back and save a lot of money in the process. 

But Hamadeh argues that it’s not practical. He said  if Alibaba considered buying Yahoo, the deal would likely face a slew of regulatory hurdles, which he speculates could wind up taking years.