AOL's takeover of Yahoo: Rumor or real?

WSJ report on possible buyout sends Yahoo shares soaring

More than two years ago Microsoft made a failed bid to buy embattled Internet search engine/portal Yahoo. The contentious deal fell through because Yahoo felt the $44.6 billion offer undervalued the company.

Bet shareholders would like to have that one back again, because right now Yahoo is looking at a rumored buyout bid from AOL at a time when Yahoo is worth less than half of the Microsoft offer from February 2008.

The Wall Street Journal reports that "people familiar with the matter" say AOL (with the help of some private equity firms) is considering making an offer to buy Yahoo.

Let's hope for the sake of Yahoo shareholder sanity that this thing plays out faster than the months-long, agonizing back-and-forth with Microsoft in 2008.

Of course, that's assuming a proposal is made. As the WSJ notes:

The people familiar with the matter cautioned that these discussions—involving private-equity firms, AOL executives and financial advisers—are preliminary and don't yet involve Yahoo. The conversations may not lead to an approach given the complexities in structuring a proposal, the people said."

Among the complexities is that AOL, with a market cap of $2.68 billion, is worth about one-tenth as much as Yahoo, currently valued at $20.56 billion. (And that's including the 5.7 percent Yahoo shares gained Wednesday in the wake of the rumors.) Which is why AOL would need private-equity help.

There are plenty of details in the WSJ article about possible scenarios, including "a complex deal in which China's Alibaba Group would buy back Yahoo's roughly 40% stake in Alibaba" and another in which Yahoo would buy AOL.

Honestly, what would that second one accomplish? Yahoo is an unfocused mess right now, treading water in the search market, struggling to grow revenue and unable to define itself clearly against Google and Facebook. None of that goes away if Yahoo purchases AOL.

Which makes you wonder why AOL would want to purchase Yahoo. The answer to that is simple: For all its problems, Yahoo remains one of the most popular destination sites on the web, ranked No. 4 behind Google, Facebook and YouTube. There's genuine value there, but it has to be extracted from the mess.

According to the WSJ, one of the people familiar with the rumored deal suggested that Yahoo could sell off chunks of its business to other media and technology players, leaving a smaller (and presumably more focused) company that "private equity firms could get financing for."

Yahoo reports its Q3 earnings next week. It'll be interesting to hear whether CEO Carol Bartz has anything to say about the buyout rumors. Probably not, but she's certainly going to be asked at the earnings conference call.

Meanwhile, Yahoo (NASDAQ: YHOO) opened trading on Wall Street Thursday morning up 1.08, or 7.1 percent, from Wednesday's closing price of 15.25. AOL (NYSE: AOL) gained 83 cents, or 3.3 percent, to 25.95.

(See also: Not so fast, Carol Bartz)

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