At least that’s the gist of a piece in The New York Post that says AOL “has huddled with bankers in recent days to discuss options, including the possibility of taking the company private.” CEO Tim Armstrong would be an idiot not to be considering such a move — and doing so hardly would be a shock considering it recently retained mergers and acquisition law firm Wachtell, Lipton, Rosen & Katz and investment bankers Allen & Company.
Shares of the New York-based media company have tumbled more than 30% percent this year as Armstrong failed to wow Wall Street with his $315 million acquisition of Huffington Post or his hyper-local Patch sites, whose annual price tag tops $160 million. The stock is trading at a rock-bottom multiple of 10, below the average P/E of 16 of the S&P 500.
As it stands now, AOL is a disparate grouping of services that make no sense in their current configuration. For instance, what possible connection does Huffington Post have to MapQuest? Maybe one can argue that a reader of the website would cut and paste links to stories to their friends over an AIM instant message, but that probably happens less than it used to because of the surging popularity of Twitter and Facebook.
The AOL “Extreme Makeover” will be much easier to do away from the prying eyes of shareholders. It will be messy and take time. Indeed, Armstrong has admitted as much, telling The New York Times that it might take until 2013 to fix AOL. That’s mostly because the fading dial-up Internet access business remains crucial to AOL’s bottom line, accounting for 37% of second-quarter revenue. Its latest 10Q says, “We believe that our subscription access service will continue to provide us with an important source of revenue and cash flow for the foreseeable future.”
AOL has been a disappointment to investors ever since its disastrous merger with Time Warner (NYSE:TWX) more than a decade ago. The heartache for shareholders continued as AOL shed about $1 billion in market capitalization since it was jettisoned from Time Warner in December 2009. A recently announced $250 million stock buyback has done little to address lingering questions about whether AOL will ever turn around.
According to the Post, “KKR has been floated as a prospective partner for AOL.” That would make as much sense as any other private equity player. One problem with taking AOL private is that free cash flow — a key metric for private equity investors — fell 43% to $77.2 million in the latest quarter. Yahoo (NASDAQ:YHOO) is another possibility, but it’s difficult to see how combining two weak companies would create one strong one. AOL might consider acquiring smaller niche media companies, but it seems doubtful that would add enough readers to please Wall Street.
As Felix Salmon of Reuters points out, developing original Web content is not cheap, and profitable websites tend to be “run on the cheap.” An exception to this premise is Bloomberg L.P., the media empire founded by New York City Mayor Mike Bloomberg. The media and data company has thrived for years outside the scrutiny of shareholders. That is a business model AOL can hope to emulate.
Jonathan Berr is a former AOL freelancer who worked for Bloomberg News for seven years. He owns no shares of the companies listed.