How Much for AOL? (Not-So-Much) Fun With Numbers!
How much is AOL really worth?
Well, its own owner, Time Warner, has been trying to put a big, shiny $10 billion price tag on the much- beleaguered online unit for months now, as it dribbles out tiny leaks about hot-and-cold- running acquisition talks with both Yahoo (YHOO) and Microsoft (MSFT).
But after yesterday’s less-than-impressive results for AOL, which dragged down the crowing Time Warner CEO Jeff Bewkes could deservedly do over his company’s “The Dark Knight” and “Sex and the City” film successes, can it even hope to get that much?
Of course, $10 billion is about half as much as AOL was valued in late 2005, when Google (GOOG) forked over $1 billion for five percent of the unit.
At the time, no one actually believed the $20 billion was a real figure, but that it was due more to Google’s incentive to overpay in order to clinch a renewal of its search deal with AOL and ward off Microsoft’s aggressive efforts to steal that business away.
But AOL’s weakening performance in a tough economy makes figuring out a sale of AOL to Yahoo–its most sensible partner–more difficult than ever.
Let’s do the math, shall we?
(This analysis was suggested to me by someone familiar with both companies and makes a lot of sense.)
Let’s begin by assuming that Time Warner (TWX) would want to trade AOL for a stake in a merged newco entity, and by using the $10 billion value the media giant seeks.
This, by the way, does not include the profitable Internet access business, which Time Warner officially announced yesterday it would cleave from the AOL ad and content business and sell separately for $2 to $3 billion.
Next calculation: At $20 a share, Yahoo is worth $27.6 billion at yesterday’s close.
So with a new valuation of $37.6 billion ($27.6 billion plus $10 billion), Time Warner would then own 26.5 percent of the company, which is jokingly dubbed Yahol.
Maybe it is just me, but I can’t see Yahoo agreeing to this. Or its big and mighty disgruntled investors, such as Capital Research Global Investors’ Gordon Crawford, either.
To appease him and other shareholders, Yahoo might first, say, sell off those much-touted Asian assets and deliver a wad of cash to shareholders.
This move would yield about $8 billion, leaving a $19.6 billion market cap for Yahoo. In a combo in that scenario, Time Warner would then own 33.7 percent of the remaining company.
And while Time Warner could throw in some other assets to add value, like video rights or content from its other properties, it’s still a leap to imagine Yahoo would trade away that much of itself for a merger that has a 50-50 chance of succeeding.
That’s because both Yahoo and AOL have been feeling the pain of the downturn in the ad market and are each particularly vulnerable.
Yahoo’s second-quarter earnings, announced a few weeks ago, were weak, which management blamed on the economy.
And yesterday, Time Warner did the same, noting the ad business at AOL had stalled.
Revenue fell 16 percent in the second quarter to $1.06 billion, largely due to a massive fall-off in its subscription business, resulting in a 36-percent drop in net income.
But online advertising revenue grew only two percent, which is–let’s just say it–depressing, largely because of a 14-percent decline in the more lucrative display business, versus its healthier but lower-margin third-party ad business.
In addition, AOL still has to figure out how to properly monetize its newly acquired Bebo unit, which it woefully overpaid for, in an even more difficult environment for social networks.
And while turning to Microsoft for a better deal might seem a good idea, the software giant is also unlikely to want to overpay in this market.
Nonetheless, Time Warner must sell AOL, which was abundantly clear yesterday, as it does not fit in with the rest of its businesses and its weakness is dragging down the stock.
Unfortunately, it could turn out to be a fire sale. Using the old AOL catchphrase, to describe the odds of getting a huge pile of dough for AOL: You’ve Got Fail.