Is a Yahoo-AOL Acquisition in the Works?

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Yahoo's dilemma: Deal or no deal? [Fortune via CNN Money]

Summary: Fortune magazine is reporting that Yahoo recently approached Time Warner about the possibility of buying internet behemoth America Online [AOL] from it. And while sources close to Yahoo and at Time Warner deny that direct talks have taken place ("Time Warner has a new strategy for AOL and is not contemplating any deals," says a Time Warner spokesman), just the notion that Yahoo! would approach AOL and propose a merger is indicative of the current state of affairs at Yahoo. With shares down 35% this year and CEO Terry Semel (pictured) coming under increasing pressure to pull off a large acquisition to follow up Google's recent YouTube grab, shareholders are growing impatient. For now, Yahoo's party line is they will "stay the course." According to CEO Semel, if Yahoo can do better at monetizing search ads and exploit new areas like ads on cellphones, videos and social-networking sites, it will do just fine. However, with Google continuing to increase its internet advertising market share, Yahoo will consider one of the following options:

1. Pull off a major acquisition. AOL and web 2.0 site Facebook come immediately to mind.
2. Allow themselves to be acquired by Microsoft. Unclear how these two companies would mesh.
3. Merge with eBay. Both companies share a mutual "Google-phobia."
4. Stay the course. The question is how long the board can endure this option.

Related links: Yahoo! Q3 2006 Earnings Call Transcript • Merrill: Yahoo Assets Could Be Attractive to Microsoft • Yahoo!'s Not As Richly Valued As It Seems • How Yahoo Can Beat Google: Start By Conceding Search • A Yahoo Acquisition of Facebook Would Be No Panacea • Some Practical Suggestions For Yahoo's Terry Semel • Who Could Acquire Yahoo? • Time-Warner Considers Cutting AOL Loose • AOL Restructures - Again
Potentially impacted stocks and ETFs: Yahoo! (YHOO), Time Warner (TWX), Google (GOOG), Microsoft (MSFT), eBay (EBAY) • Internet HOLDRS (HHH), First Tr DJ Internet Index (FDN)

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