Dot.com flashback: AOL chief mulls merger with Yahoo

To close out a a week of drama at Yahoo, AOL CEO Tim Armstrong has approached advisors for the other 1990s internet giant to gauge interest in a merger.

Bloomberg is reporting that Armstrong has spoken with investment bankers from Allen & Co. who are advising Yahoo on its strategic review. Of course, that’s an easy conversation to schedule because the bankers advise both AOL and Yahoo. Conflict of interest anyone?

The first thing that comes to mind is what value, if any, is there in combining two internet giants that are struggling to regain their form in the post-portal age dominated by search and social networks.

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The Wall Street Journal’s Shira Ovide said, “ Dear AOL and Yahoo: Find Another Banker”.

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ZDNet’s Rachel King said: “Seriously, what is this? A flashback to the late 1990s? How are these two companies even relevant anymore?”

Wired’s Tim Carmody called the move a “spectacularly crazy idea”.Tying together two stones doesn’t make them float, and as Carmody points out, while Yahoo might be wounded, AOL is worse. AOL’s market cap is $1.6 bn, but Yahoo is still worth $18.2 bn.

AOL and Yahoo have already toyed with the idea of a merger, once three years ago and as recently as a year ago.

Besides, despite the turmoil at Yahoo, it still has been turning a profit since the fourth quarter of 2008, which is a lot better than AOL can say. AOL’s results might be getting less horrible, but the company is still losing money.

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It’s a point that even Yahoo might understand. While Armstrong might be keen to explore a combination, CNBC says that Yahoo is less so.

Moreover, up until the beginning of this year, Yahoo still held the top spot in the US display advertising market, while AOL is projected to drift gently downward in ad share, despite Armstrong’s efforts to remake AOL into a digital content company.

Emarketer.com estimates that AOL will decline from having a 6.4 percent of the US display ad market in 2009 to only 3.9 percent of the market in 2012. Yahoo is estimated to still have three times that amount in 2012 with 12.5 percent. By comparison, both are left in the dust by Facebook, which passed Yahoo this year to take the top display ad market spot and is expected to dominate the market by 2012 with a 19.4% market share.

AOL still struggling with Huffington Post deal

A Yahoo-AOL tie up would be AOL and Time Warner all over again. AOL’s merger with Time Warner is considered one of the worst executed in history, and in many ways, it looks like AOL is trying to go for a perfect record in terms of failed mergers after its purchase of the Huffington Post earlier this year.

This week, in another sign that all is not well with the Arianna Huffington-led AOL editorial division, TechCrunch founder Michael Arrington threw a strop saying that he wanted Huffington to keep her hands off of his site, even as he moved on to run a new AOL-backed venture capital fund. He is even reported to have offered to buy back the site. It’s yet more unnecessary Huffington-induced drama at the company, with few good options.

AOL went through a management reorganisation earlier this summer and posted second quarter results in August that disappointed investors, even though it stopped its global advertising revenue slide.

Needless to say, the last thing that either AOL or Yahoo needs right now is more merger challenges.