On the surface it's laughable, one of those 1+1=0.5 deals.
But look below the surface, and this could be the start of something that makes sense.
First, AOL's biggest problem is its infrastructure. It's obsolete. Yahoo has been using a more up-to-date cloud infrastructure for years. Moving AOL's content to Yahoo (or another cloud provider) lets it lay off a bunch of programmers, close facilities, and save money.
Second, AOL's content is not worthless. The idea of combining content and community to build a vertical market audience makes sense.
As they said in the Palmolive ads years ago, "you're soaking in it."
That's what Seeking Alpha is about. See the ads around this story? They're narrowly targeted at active investors. Your eyeballs are worth more than the run-of-the-mill eyeball to these advertisers. It's efficient use of their money, even if the per-page rate is higher than normal on the Web.
This is what Armstrong saw when he bought Huffingtonpost, a scaled site aimed at a specific demographic advertisers might covet.
Making it all work, however, took three ingredients Armstrong lacked at AOL. A low-cost infrastructure. A solid ad network. Entrepreneurial publishers.
Yahoo would offer the first two, but not the last. So I don't think Yahoo is AOL's final destination.
Enter Microsoft (NASDAQ:MSFT). If Microsoft buys Yahoo, and sells its stake in Alibaba back to founder Jack Ma, it will get Yahoo's cloud and AOL's content at a bargain price. The cloud could be merged with Azure, the content could be sold through Microsoft's current agency set-up.
But at the end of the day there is one more ingredient needed to make this work, something Microsoft has experience with. Joint-ventures.
Once AOL's content is on a common platform, for both hosting and advertising, it can be sold to publishers in pieces. There are a host of vertical market publishers that have yet to effectively embrace the online world, and Microsoft could offer them all the tools they would need. Patch, AOL's most troubled unit, could effectively become a franchise, especially when combined with MSNBC's Everyblock.
It would take some time, but at the end of the day there would be new profits, new businesses and new opportunities. I'm not saying this is the way it has to go, but hedge funds and private capital players which like to do deals are circling Yahoo right now.
If AOL doesn't go somewhere, if something isn't done pretty quickly, the whole AOL house of cards is going down. Once a company gets the stench of failure it doesn't come off, and that's the stink a deal like this would wash off.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.