Kara Swisher

Recent Posts by Kara Swisher

Update on the AOL-Yahoo Deal: "Like Trying to Catch a Falling Knife"

Last week, Bloomberg reported that Yahoo and AOL were still chit-chatting about a possible deal–non-news, actually, given the pair have never stopped talking.

Nonetheless, it set off yet another flurry of excitement on Wall Street that a deal to merge the two troubled Internet companies was imminent.

But you might have a quicker time watching grass grow, according to numerous sources BoomTown has talked to over the last week about exactly where the AOL-Yahoo deal is.

And that would be, as various people told me: “tabled,” “back-burnered” and, my personal favorite, “like trying to catch a falling knife.”

What is meant by that quote is that the range of forces, hitting Yahoo (YHOO) in particular–from its CEO Jerry Yang announcing he was stepping down and a search for a new CEO was on to the weak economic outlook for the graphical ad business to decisions on what to do with its search business–has disturbed the deal’s noise-to-signal ratio.

“It’s a complicated situation over there,” said an exec at Time Warner (TWX), which owns AOL, about dealing with Yahoo. “The company now has a lot of decisions to make, and how it makes them impacts the deal.”

But, said many sources, it is not for lack of interest in doing the deal, which both sides consider an important step in reviving their fortunes.

The pair own the top content and communications assets online, as well as important online advertising assets, which–if properly managed and integrated–could become stronger together, especially as the economy improves.

That said, the idea of combining AOL and Yahoo is a daunting one, especially with the current leadership vacuum at the top of Yahoo, and could result in an even bigger quagmire.

Major cuts in staff and products would need to be made, for example, to make the deal more palatable to investors.

In addition, the pair are still far apart on price and structure, especially since Yahoo’s shares have been at such a low price.

Said one person familiar with the situation: “Yahoo is now at a point where they can’t get a positive deal done unless they buy AOL for peanuts. And Time Warner has already lowered the price and will look like idiots. They want to unload AOL, but not at any price.”

And, indeed, sources say Yahoo wants to pay about $3 billion to $4 billion dollars, while Time Warner wants $5 billion to $6 billion.

That’s a major delta, of course, which needs strong leadership to bridge.

And, while striking the deal might be Yang’s final coup de grace as a CEO and he is still hard at work on it, even perhaps thinking of sussing out some new partners, consummating it also makes it harder to attract a new CEO, who obviously would like to be part of such a momentous deal.

That’s especially true since that person would be the one to clean it all up and make it work.

So, to my mind, Yahoo striking a Microsoft (MSFT) search deal first makes more sense, so that’s what I am monitoring. Such a deal would surely boost Yahoo’s revenues and stock price, allowing it to pay more for AOL.

Of course, Microsoft archrival Google (GOOG) is also in the mix, owning five percent of AOL and also its search partner until next year. (As night follows day, of course, Microsoft is already sniffing around, many sources report, with hopes of trying again to grab that deal away.)

As for AOL, it is continuing to make cuts of lots of stuff that has not worked and streamline itself for what most expect will be an eventual sale, including lopping off its money-generating access business from its advertising, content and communications one.

But, said sources, AOL is also continuing to try to innovate in its social and content properties, so expect some announcements there, perhaps after the new year.

“Both Yahoo and AOL have to get to the core of what they are and are going to be,” said one source close to both sides. “Doing a deal without clarity is really a prescription for failure.”

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work