There isn’t much chance that AOL (NYSE: AOL), with a market cap of about $2.6 billion, could acquire Yahoo! (NASDAQ: YHOO) — market cap of about $20.5 billion — on its own. But with a little help from some friends, such a deal may not be totally out of the question.
That’s the story, at least according to The Wall Street Journal, which cites “people familiar with the matter” as saying that both private equity firm Silver Lake Partners and Blackstone Group (NYSE: BX) are among companies that “have expressed interest” in joining AOL in a bid for Yahoo.
Should such a deal happen, it could salve the still-smarting wounds that Yahoo shareholders must feel from the company’s rejection of a $45 billion offer from Microsoft (NASDAQ: MSFT) in 2008. Yahoo’s search-engine business is a distant second to industry leader Google (NASDAQ: GOOG).
What to do with Yahoo’s stake in China’s Alibaba Group is very likely to be at the center of any discussion about an acquisition. Yahoo owns about 40% of Alibaba, and that stake represents about half of Yahoo’s own market cap. Alibaba offered to buy back its stake for $11 billion recently, but Yahoo rejected the offer. If one of the potential takeover partners could convince Alibaba to buy back its shares, the deal for Yahoo would be a lot easier to finance. After all, $10 billion is a lot less than $20 billion.
But it’s unlikely that Yahoo CEO Carol Bartz would go gently into that good night. She would not want to take a low-ball offer, and may end up doing exactly what her predecessor did — rejecting any offer, no matter how lucrative, as insufficient. If that happens, Yahoo shareholders would probably not be legally responsible for their actions.
The only business reason for AOL to acquire Yahoo is to compete better against Google. But combined, the two companies claim at most 28% of the search market compared with Google’s share of more than 60%. The combined company would still be going nowhere, especially since neither has any presence in the mobile advertising space.
An AOL tie-up with Yahoo never made sense back in the day. It makes even less sense now.
As of this writing, Paul Ausick did not own a position inany of the stocks named here.