AOL considering breakup, merger with Yahoo

Faith Merino · December 6, 2010 · Short URL:

The plans are in the exploratory stages, sources say

AOL may be considering a breakup of its business which could lead to a merger with Yahoo, according to sources close to the matter who spoke with Reuters.  As of yet, AOL is still exploring the possibilities and no firm decision has been made either way.  Yahoo has yet to hear from AOL regarding the matter, Reuters reported Monday.

The breakup proposal would mirror similar 2008 plans when Time Warner considered breaking up AOL’s two main businesses.  AOL’s dial-up Internet service would have been sold to Earthlink or United Online, and its display advertising would have merged with Yahoo.  Reuter’s sources reported that Time Warner opted to spin off AOL rather than deal with the tax liabilities that would have come along with the breakup.

AOL has reportedly continued to consider a breakup since December 2009, but it is uncertain if Earthlink or Yahoo would be game.  Earthlink acquired Deltacom Inc. in October 2010 for $516 million and is not likely to pursue another big transaction, while Yahoo is reportedly not interested in a buy-out deal with AOL.

Neither company responded to email inquiries from VatorNews.

While dial-up has gone the way of the dinosaur for most people, AOL’s dial-up service remains a lucrative business and accounts for the bulk of AOL’s revenues.  This year alone, AOL’s dial-up service is expected to bring in $1 billion out of the company’s total $2.4 billion in overall revenue.  Nevertheless, the company’s 4 million-strong dial-up user base is shrinking quickly, dropping off by 200,000 to 300,000 every quarter.  The future of its advertising business is equally dismal, shrinking 28% over the course of 2010.

In order for any kind of AOL/Yahoo merger to work, Yahoo would need to pare down, the insiders told Reuters, adding that if this were to happen, Yahoo would likely sell its 40% stake in China’s Alibaba Group Holdings, but the tax migraine that would come along with such a plan could prove to be too much to deal with. 

"That strategy is the equivalent of throwing a basketball from underneath your own hoop it is not going to happen,” said one source.

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