Reports are coming out that AOL is talking to Yahoo’s (YHOO) bankers about merging the two companies in the wake of Yahoo CEO Carol Bartz getting canned. We have an independent source who confirms discussions are happening, but it is not clear how serious they are. If a deal does go through, the likeliest scenario would be Yahoo acquiring AOL, with Tim Armstrong becoming the new CEO. (Disclosure: AOL owns TechCrunch).
While a combination of AOL and Yahoo is always an option, with the main advantage being that it solves Yahoo’s leadership search problem if Armstrong becomes the CEO, it is not a particularly good option. Two dogs don’t make a right (at least in the eyes of Wall Street).
It is also not a new option. Every couple of years, bankers raise the AOL-Yahoo trial balloon. The main argument for a merger wi that it would give the combined company even more scale in terms of online advertising inventory. But as I wrote last tie this trial balloon was raised:
Buying scale makes sense to some extent. And Yahoo buying AOL, rather than the other way around, would make even more sense and be a lot cleaner. . . . But there are downsides as well. While Yahoo and AOL are distracted with firing people and integrating business units and backend technologies for at least two years, the Internet will continue to move ahead without them. Big mergers rarely work out well.
While it might look convincing enough on paper, what . . . two aging portal players proposing to prop each other up . . . really have to ask themselves is this: Do they want to merge with the past, or invent the future? Merging doesn’t help them with social. It doesn’t help them with search. It doesn’t help them with mobile, and it barely helps them with local. It only helps them with one thing: scale. And that may no longer be enough.
In other words, the risks of a messy integration are too high. And it is not clear how such a merger positions either company for a brighter future.