Activist shareholders with an apparent dual interest in unlocking shareholder value and generating Wall Street drama are again agitating for a Yahoo-AOL merger. It’s a combination, talked about since at least 2008, that some analysts think is a terrible idea.
This morning Reuters reported that two of Yahoo’s largest shareholders are so impatient with the turnaround and low valuation of the Web portal’s core business that they have asked AOL Chief Executive Tim Armstrong to explore a merger. Armstrong, according to the article, is amenable but would only consider an amicable deal—a highly unlikely scenario.
There are currently no official talks between the companies, but as a development that involves one of Silicon Valley’s flashiest leaders and most visible companies, it’s news today. A Yahoo spokesperson declined to comment on the report.
Yahoo stock has risen appreciably under Mayer, though most investors dismiss that growth to its successful investment in Chinese e-commerce juggernaut Alibaba. Last month Yahoo delivered measurably improved third quarter results and Mayer trumpeted her progress with an aggressive acquisition strategy, a renewed focus on mobile apps, and revenues that are finally rising a bit. Today the company’s stock surpassed $50 for the first time since the early 2000s.
Yet that isn’t enough for the skeptics, who apparently have lost patience—or never had it to begin with—with what was always destined to be a long-term climb.
In September, activist investor Starboard Value LP published a letter to Mayer disclosing its stake in the company and arguing that Yahoo was “deeply undervalued relative to the sum of its parts.” The investor than re-introduced the idea of a tie-up with AOL, trumpeting a host of tax benefits and the possibility of bringing AOL’s video ad technology to Yahoo.
Some analysts have viewed this as a bad idea. Combining the two organizations, which are headquartered on opposite coasts, would generate massive challenges at a time when both companies are racing desperately to keep up with Google and Facebook in display and mobile advertising. “The tech and non-tech worlds are full of mergers between large companies that have destroyed tremendous value,” wrote Cowen & Co. analysts John Blackledge and Thomas Champion in a September research note.
Brian Weiser, a senior research analyst with Pivotal Research Group, agreed with some of the logic behind Starboard’s proposal but acknowledged enormous practical problems that would face a merger. A proxy fight, he speculates, may be the only way it could happen:
“There is significant industrial logic behind a combination [of AOL] with Yahoo, although it always seemed unlikely that one of the management teams would step aside to make a transaction work. Moreover, among the two, AOL is the one which made the right calls in terms of how to evolve a legacy portal/ad network business into one positioned to maintain relevance with the advertising community. However, Yahoo has had greater capital resources, limiting the potential for AOL to pursue anything directly.”
Yahoo is also plunging ahead on its own to develop new video ad tools. On Tuesday it announced it was buying 8-year old video advertising service BrightRoll for $640 million in cash, another sign that Mayer is not slowing down and prefers to bring in talent from fast-moving startups.
The new investors lobbying for an AOL tie-up believe a combined company could generate $1.5 billion in cost savings, partly from reduction in sales force while growing the online audience which it sells ads against. The history of such combinations suggest that the savings, while significant, are hardly guaranteed. The new company would probably end up spending a a small chunk of that in payments to branding and PR firms to try to spin the new entity as something other than a horrible mess.
