The Wall Street Journal is reporting that private equity firms together with AOL are looking to merge AOL and Yahoo! (YHOO). We have argued in the past that Yahoo! needs to take decisive actions to boost its stock price, and failing that, private equity should look into buying Yahoo!. See the write-up here. However, merging AOL and Yahoo!, two fundamentally and secularly challenged companies, is a bad idea. Two wrongs never make a right. Private equity taking either Yahoo! or AOL private does make sense. Nonetheless, any attempt by a private equity firm to buy Yahoo! or merge it with AOL will force Microsoft (MSFT) into making a full offer for Yahoo!. Yahoo! shareholders win.
There are several reasons why merging Yahoo! and AOL is not worth the headache:
- There are no clear scale benefits to merging the two companies in display, search, or social networking.
- The two share two different search partners, AOL with Google (GOOG) and Yahoo! with Microsoft, both in long-term contracts.
- Getting Yahoo!'s board to agree to this will be tough although given the disastrous handling of the Microsoft offer, they may be forced to seriously consider this one.
- Cost synergies will be not be accretive enough to add material value to the merged entity
- Bartz or Armstrong? Bartz has 18 months left on her contract and it will be costly to rid her of her title. Plus, we get the feeling that she would not bow out gracefully.