Wondering what’s next after the news that Yahoo apparently plans to reject Microsoft’s takeover offer? The Times Of London reports Yahoo will restart merger talks with AOL. Below, more about the news along with some back history on AOL in search and why a Yahoo-AOL partnership might indeed be a compelling way to convince Yahoo shareholders to resist Microsoft.
From the article:
It is understood that Yahoo! and its team of advisers from Goldman Sachs and Lehman Brothers, the US investment banks, have spent the past week evaluating possible tie-ups with media and technology firms that would save it from being swallowed by Microsoft.
It is also understood that one option being explored is to restart merger talks with AOL, the online business owned by Time Warner. Tie-ups with groups such as Google or Disney are also being considered. Although Yahoo! and AOL previously failed to join forces because of differences over price, it is hoped that the urgency created by an unwelcome approach from Microsoft and an impending economic downturn will spur the two into new talks.
The article touches on issues that came up in the earlier report of Yahoo’s expected plans to reject Microsoft — that it considers Microsoft swooping in for the kill at a price that doesn’t value Yahoo enough, and that a share price of $40 or higher would be necessary for Yahoo to consider a Microsoft move.
Yahoo is expected to publicly announce its decision today. For Microsoft to move ahead with Yahoo, it would either need to get shareholders to pressure Yahoo’s board or wage an even more hostile attempt to oust the board, something made difficult through various poison pill provisions that Yahoo has in place. The nomination process for new board members opens this week, on February 13, and runs for 30 days, ahead of Yahoo’s regular annual meeting.
Would a Yahoo-AOL tie-up make sense? To be honest, I haven’t spent much time looking at duplications in audience shares over various portal features. No doubt, the various rating services will start churning this material out shortly.
In terms of search, it makes much more sense than the "scale economics" pitch Microsoft has been putting out. In that, Microsoft argues that both companies are somehow wasting resources that could go into beating Google by running a single search index. That just doesn’t wash as a reason for Microsoft for having failed to beat Google in its now five-year search war (see Microsoft’s "Third Era" Of Search Begins With Departure Of Search Chief Christopher Payne and Microsoft Live Search Core Relevance Program Management Director Eytan Seidman Moves On for more background on that). Microsoft has billions of dollars at its disposal to spend on search and has shown no hesitation in making that spending.
Instead, getting Yahoo has seemed much more about acquiring Yahoo’s audience, necessary to advance Microsoft’s search and online advertising agenda. Some recent articles from us exploring more about that reason and how Yahoo and Microsoft largely duplicate each other:
- MSFT + YHOO: What Would Microsoft Yahoo Look Like?
- Q&A With Microsoft On Proposed Yahoo Purchase: 2+2 = #1
- Microsoft’s Prize: Big Yahoo CPMs, Largest Display Share
- MicroHoo: Boon Or Bust For Yahoo?
- Google Objects To Microsoft & Yahoo Wedding; Microsoft Responds — Irony All Around
In contrast, to Microsoft, AOL lacks core search functionality. It doesn’t crawl the web, and while it does have its own paid search listings program now, that’s simply a white-label version of Google’s, to my understanding. A tie up with Yahoo wouldn’t see a duplication of efforts or the integration problems that Microsoft would face.
AOL does have a growing video search feature and technology with Truveo, and it is still a powerhouse in some areas, such as finance. But the company largely feels like it has stalled on the search front overall. Long time search exec Jerry Campbell departed in late 2006, its FullView architecture that made it more than just a Google clone was abandoned in early 2007, and the company has seen its share of search drop over the years. Why is uncertain. Much, in my view, has to do with the fact that many people no longer see AOL as a start up screen since it started pulling back on its subscription services. comScore puts it around 4.5 percent; NetRatings about the same.
See my History Of AOL Search post from last year for more about AOL’s search moves over the years. Most of AOL’s activity recently seems to have been buying up all types of advertising companies. Last year, it brought Tacoda, which does behavioral advertising, as as well began moves to acquire Quigo — which has been doing contextual advertising for almost as long as Google (and much longer than Yahoo). These units, along with others, make up AOL’s Platform-A business group. As the company describes it:
AOL offers advertisers access to the broadest display advertising network in the U.S. and some of the most sophisticated tools available to target and measure online advertising campaigns through AOL’s Platform-A business group. Platform-A consists of Advertising.com, which operates the largest third-party display networks; behavioral targeting leader TACODA; Third Screen Media, which operates one of the largest mobile media networks; market leading video ad serving platform Lightningcast; Quigo, which offers advertisers the ability to target ads based on the content of Web pages; and ADTECH’s global ad serving platform.
AOL just added yet another company to the group, the Buy.at affiliate network.
An AOL-Yahoo tie-up? I’d say there’s less duplication than Microsoft-Yahoo and perhaps more synergies. But the key question is whether it would make Yahoo’s shares ultimately worth more than if Yahoo went with Microsoft. No one really knows. Microsoft certainly could use Yahoo as part of taking on Google in the application space — Yahoo is by far the reigning champion there earning cold hard cash from its sales. But Google is a major threat if it can grow free apps that are funded by its online advertising. As I explained before:
Where Microsoft really can argue that Yahoo needs its help is on the application side of Google’s ambitions. Remember Google’s current tag line: "search, ads & apps." Want to see the winners in each category? Let’s look:
- Search: Google in first, Yahoo in second, Microsoft in third
- Ads: Google in first, Yahoo in second, Microsoft in third
- Apps: Microsoft in first, Google in second, Yahoo in third
Yahoo’s fine with search and advertising. It’s in the apps space where Microsoft could help. By apps, I’m talking about things like Microsoft Office, which is making Microsoft billions per quarter. Google continues to build what’s effectively Google Office, which practically no one uses. But I and many others think that will change.
The question is, to fight Google, do you need to fight it on all fronts? Do you need to have a free web analytics program, blogging systems, mapping programs, and much more?
Frankly, Yahoo might be able to argue to shareholders that it can indeed deliver value as being a leader in the search and ads space without the distraction of trying to fight Google on the apps front as well.
One last twist in all this. Don’t forget that Google owns 5 percent of AOL, and as Silicon Alley Insider reminded last year, Google has the right to force an AOL IPO or get Time Warner to buy back its stake at fair market value by July 1, 2008. Google, which wants to stop the Yahoo-Microsoft tie-up, might be able to sweeten the idea of Yahoo getting AOL by reducing its rights or potential payout as part of that agreement.
For related discussion on today’s news, see Techmeme.