A story today says Yahoo has approached Time Warner about the possibility of buying its AOL unit. link. The piece in Fortune includes a pretty strong denial from a source close to Yahoo, who says Yahoo didn't approach Time Warner and that there are no active conversations between the companies. I hear from a source familiar with the matter that the overture "did not happen."
Why would Yahoo want AOL? "Search is a scale business, and such a deal would build great scale," says Ryan Jacob, of the Jacob Internet Fund. "The more scale you have, the more clicks you get, the more you can charge for ads."
Acquisitions certainly play a role at Yahoo. link. Investors want to see more growth from Yahoo, which has seen its stock price decline 35% over the last year. Jacob thinks Yahoo might be better off with smaller companies that have a younger demographic, though.
Some strategists like the idea of a Yahoo-AOL deal. "It makes tremendous sense on several levels," says investment banker Ken Marlin, of Marlin & Associates. He thinks both risk becoming irrelevant if they don't do somethng bold. He likes the scale that would come of such a transaction, and he says AOL and Yahoo would be good cultural fit.
Regardless of whether the deal makes sense, it doesn't appear to be happening. Even if both parties were willing to do a deal, it could be complicated by the fact that Yahoo rival Google owns 5% of AOL. As Jacob notes, no one can say for sure how Google would react to the prospect of AOL and Yahoo joining forces against it. Best bet: not happy.
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