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Summary:

The idea that AOL might want to merge with Yahoo — as a news report on Friday said it does — isn’t surprising, since the company has tried to arrange a similar deal at least twice. The only question is which metaphor for failure should apply.

The idea that AOL might want to merge with Yahoo — as it reportedly does, according to a pair of anonymous sources who spoke to Bloomberg News on Friday — isn’t all that surprising. There have been rumors about merger talks between AOL and its fellow former web giant off and on since 2008, with the most recent round coming at the end of last year. The only question left is which analogy you prefer when it comes to picturing this potential combination: two old dogs roped together? Two bricks tied up in the hope that they will float? Two drunks trying to prop each other up as they stagger down the street? Feel free to fill in your own suggestions below.

According to the Bloomberg report, AOL has opened up discussions with Yahoo’s financial advisors, and suggested the two companies could be combined, with AOL CEO Tim Armstrong emerging as the CEO of the new entity after the deal. Yahoo, of course, is currently in need of a chief executive, since it just finished giving its old one — Carol Bartz — the heave-ho earlier this week, something Bartz apparently took with her usual display of tact and grace (there have also been reports that co-founder Jerry Yang might be trying to mount a bid to take Yahoo private).

Is Yahoo playing hard to get?

Within minutes of the Bloomberg report hitting the web, CNBC (c cmcsa) posted to its Twitter account that it had heard from a Yahoo source that the company had no interest in merging with AOL. That doesn’t necessarily mean a deal couldn’t happen, however — Yahoo’s response could be a negotiating tactic, or the board of directors may not want to show its hand publicly at this point. It’s also possible Yahoo could wind up in play whether it wants to be or not. According to the Wall Street Journal,the last AOL bid to merge involved several large private-equity firms who wanted to finance the deal.

AOL’s interest in a deal is easy to explain: As we noted in a recent post, Armstrong is likely feeling some heat as a result of the company’s moribund financial performance, and is looking for some kind of way to generate value. Like his former counterpart at Yahoo, he has spent two years cutting costs and trying to generate new lines of business — including the purchase of The Huffington Post for $315 million, and more than $150 million spent on building out the hyperlocal Patch.com network.

But while AOL’s chief executive has continually promised that a turnaround is near, with every quarterly report that goal continues to recede into the distance. Analysts say he either has to split the company up and sell the pieces, or find some other way of generating value — or be removed from the job so someone else can. And while merging with Yahoo probably wouldn’t be a great long-term strategy, it might produce enough of a short-term benefit for the company’s investors that Armstrong could justify doing it.

The proposal that Bloomberg described in its report is similar to the one that AOL was apparently floating in the fall of last year, which would have seen Yahoo either acquire AOL outright (since it is much larger than AOL, with a market capitalization of about $18 billion, compared to AOL’s $1.6 billion), or merge with the former web portal in a complex deal involving the sale of Yahoo’s investment in Chinese web giant Alibaba — which is responsible for much of the company’s current market value.

Memories of 2008 and a rejected Microsoft bid

The idea of an AOL-Yahoo merger was also discussed in 2008, when Microsoft made a $45-billion takeover bid for Yahoo — a bid the web company no doubt wishes it had taken at this point, since its market value is less than a third of that now (something that likely contributed to the poor reviews for former CEO Bartz). Eventually, Microsoft withdrew its bid for Yahoo, and the talks about a merger with AOL never proceeded.

Are the chances of a deal any better this time around? It’s hard to see how. The biggest stumbling block to a merger is the lack of any compelling rationale for doing one, despite efforts to make that case. Both companies are suffering from the same overall problem: They have millions of visitors to their web properties, but the advertising revenue that they are able to generate from that traffic remains unimpressive, and is likely to dwindle. AOL has the added problem of watching its dial-up access business — which generates the majority of its cash flow — continue to disintegrate.

Hence the “two rocks tied together” metaphors. A merger may make Tim Armstrong look (at least briefly) like a success, and possibly catapult him into the CEO’s chair at Yahoo — but combining these two ailing giants isn’t going to magically produce a competitive web business, no matter how many financial architects get their hands on the deal.

Post and thumbnail photos courtesy of Flickr user Hans Gerwitz

  1. A merger between the two wouldn’t really hurt either right now. Both are pretty much at rock bottom, and they can only go up from here.

    Maybe together they can figure out something worthwhile to do?

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    1. I’m thinking you need to look up the definitions of both Rock and Bottom. Neither of these companies are going anywhere.

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  2. the combo would be just a ship short of a shipwreck.

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  3. Don’t underestimate the Yahoo board, they’ve proven they got the ability to screw anything up. The only way AOL or any company should think of working with them is if the whole board resigns!

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  4. The best thing about this merger is the resulting shorter time that we would have to hear about either company.

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  5. It’s a race to the bottom and they want to tie!

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  6. Since you asked:
    Two drunken sailors washed overboard in the middle of the ocean in a Hurricane at night given each other directions how to swim to the nearest beach.

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  7. I am not so sure where these pieces of news about Yahoo are leading to, but one thing is for sure: they are all grim information. AOL is another lost soul, so to speak. If Yahoo wants to save itself desperately, it might as well sell itself to Microsoft.

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  8. You have got to be joking. Tim Armstrong as the CEO of the merged companies? The guy has been a disaster for AOL. Why would he be considered for anything other than being fired from AOL for poor performance?

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  9. This is the two ugliest people at the dance hooking up. The offspring would not be attractive

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  10. If Yahoo joined forces with Samsung, LG and developed a platform around MeeGo OS then it could be a winner.

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