Will Microsoft Now Turn Its Eye to AOL?

With Microsoft (MSFT) stepping aside (again) from talks with Yahoo (YHOO), the obvious question is whether the company is going to start shopping elsewhere.

One obvious potential target is Time-Warner’s (TWX) AOL unit. The company has made it clear that AOL can be bought for the right price. Gabelli & Co. analyst Christopher Marangi this morning asserted in a research note that AOL might be Microsoft’s second-best option. “AOL has sits challenges, but no other available Internet asset possess its breadth or scale,” he writes. “An acquisition of AOL would modestly increase MSFT’s search share, boost its page views and give it the dominant third-party ad network in Platform A.”

Marangi says he sees the AOL access business - which MSFT would likely not want - at $2.8 billion. The rest of the company, he says, is worth about $12 billion. Time Warner is in the process of separating the two pieces.

As for Time Warner, Marangi says selling AOL could be a major catalyst for the stock. He notes that it would turn the company into “a pure-play content company, free from the management distractions and baggage that have surrounded AOL.” He contends that proceeds from a sale would be “found money,” calculating that investors are currently giving AOL a value of zero.

Comments

[M Twain]

As an employee of one of the companies AOL's Platform-A has acquired in the past year, I really hope TWX doesn't sell AOL to MSFT. We're just starting to feel integrated. The vision for the company is compelling and we're just beginning to execute it. Spending another 6-18 months in limbo is not good for the employees, the customers, or the industry in general.

[MuddlingInvestor]

Icahn has some say on TWX board, so if MSFT show any kind of interest, it's done deal. AOL is dead anyway, it just doesn't know it. Microsoft buying it would be just coup de grace. For MSFT, just money to the wind, but it's not the first time.

[Zomack]

As a consumer, I'm not a huge fan of recent consolidation in this space. Ideally I'd love to see a bunch of competitors offering differentiated and compelling services/products. Ideally.

As aninvestor, though, I understand that consolidation is inevitable in "hot" sectors like this, especially when you've got cash-rich, high-growth behemoths involved. If MSFT and YHOO are obviously "worried" enough about GOOG increasing an already dominant position, then TWX/AOL would be lucky to even be around(in a meaningful way, that is) in 18 months without some sort of major partnership or outright takeover.

My basic observations are these:
- GOOG has been and is in the lead here, and they're only increasing market share as the quarters pass. They've got tons of cash and are not slowing down.
- YHOO is desperate and is reaching. If GOOG deal gets trimmed(or denied) by anti-trust concerns I could see them crawling back to MSFT(or even AOL or some up-and-comer looking to make a splash).
- MSFT knows it's in a distant second place but has tons of cash and a culture that cannot stand being Number Two(no matter what it takes to be Number One). Hard for me to bet against this combination in the long run. Having said that, you really can't win EVERYtime.
- AOL is one of a single-handful of even somewhat meaningful acquisitions left. TWX and Icahn are open to an AOL deal.

Put it all together and...
- YHOO-MSFT end up in eachother's arms again
- It turns into GOOG/YHOO versus MSFT/AOL
- GOOG stays #1, MSFT settles for #2 and YHOO/AOL fight for #3 scraps.

Now, I'm not making a judgement call on whether any of these is "good"(for investors, consumers, or investors) -- I've got to do more research. But, I do think it lays out the landscape, in general.

[M Twain]

People seem to forget that Google is dominant in search, not everything else. The game isn't over yet.