May find a good fit with AOL content
According to a report from Reuters, []AOL is actively exploring a breakup involving a complicated series of transactions that may lead to a merger with Yahoo. We believe that Yahoo might be interested in AOL’s content business as it would complement Yahoo’s own content business.
We estimate that AOL’s display ad business constitutes around 60% of the $25 Trefis price estimate for AOL’s stock, which gives us a valuation of around $1.6 billion for the content business alone. As a comparison, Yahoo’s display business is around 22% of our estimate of almost $26 billion in enterprise value, or around $5.7 billion on a standalone basis. We believe that a marriage of the two could make sense as we explain below.
Yahoo and AOL Content Business Merger Makes Strategic Sense
AOL has three main business lines: display ad business, search ad business and dial-up Internet subscriptions business. Yahoo’s core business is display ads and search ads, although it has started to focus more on its content business over the last few years. Yahoo partnered with Microsoft on Bing to drive its search technology, which allows Yahoo to free up its resources from its search business and concentrate its efforts on expanding its content business. Yahoo may not be interested in AOL’s dial-up business since it is a dying business for AOL, and does not provide any synergies to its existing business.
Hence, we believe that AOL provides Yahoo with an ideal platform to aggressively expand its content offerings and drive its display ad business.
AOL’s strength lies in maps, entertainment news and blogging, which provides an ideal fit for Yahoo properties related to sports, finance and email. AOL has an average of around 118 million monthly unique visitors as of 2009, and we expect it to increase to 127 million by the end of the Trefis forecast period.
On the other hand, Yahoo has around 600 million average monthly uniques as of 2009, and we expect this to increase to around 800 million by the end of Trefis forecast period. Depending on what a combined platform might look like, Yahoo’s hope would clearly be that with expanded content capabilities from AOL and its search business, Yahoo’s traffic would increase by much more than the current combined traffic figures which would boost advertising revenues. This would also help grow the search business which we estimate is around 25% of Yahoo’s value.
While it remains difficult to quantify the financial impact of this until we know of a rough structure, we can look at the independent value drivers of the two companies and see that a couple of scenarios could makes sense.
You can see the complete $24.97 Trefis price estimate for AOL stock here.
You can see the complete $18.53 Trefis price estimate for Yahoo stock here.
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