Filed under: Deals, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO), Time Warner (TWX)
With Microsoft Corp.’s (NASDAQ: MSFT) $44.6 billion bid for Yahoo (NASDAQ: YHOO), DealBook asks whether Google (NASDAQ: GOOG) will acquire AOL, whose parent is Time Warner Inc. (NYSE: TWX), the parent of BloggingStocks.
Google, whose businesses include an advertising platform as well as an Internet service and a web site, already owns 5% of AOL, and it might feel compelled to bulk up by buying AOL so it can keep up with Microsoft and Yahoo — should they merge.
I’m not sure how much AOL would go for, but my hunch is that Google — whose stock is down almost 10% this day — can find better uses for its capital. How so? If Google bought the remaining 95% of AOL it does not already own, it would get access to the following assets:
- AOL Finance’s leading market share. which, according to comScore, has passed both Yahoo and Microsoft to take the top spot in terms of very special visitors. AOL rose from 12.2 million unique visitors in November to 13.5 million in December, a 10% increase. This is much better than GoogleFinance’s much smaller market share. And according to paidcontent, a full acquisition would aid Google on the advertising side as well as with traction and traffic in portal areas it has yet to conquer such as finance and sports.
- AOL’s very low search market share. According to compete.com, AOL’s search engine market share was a mere 1.7% in December compared to 68.1% for Google. Google wouldn’t be getting much here.
- Considerable cash flows. For the nine months ended September 30, 2007, AOL reported total revenues of $3.930 billion, and had $2.120 billion in operating Income before depreciation and amortization (OIBDA) and $1.739 billion in operating income. Both of these include $668 million related to the sale of AOL’s German access business.
So how much would a 95% stake in AOL cost? Well, applying the ratio of Yahoo’s current price to its cash flow — 23.9 x cash flow — the 95% share of AOL would cost Google $39.6 billion — or 24% of its market capitalization. (To compute this, I annualized AOL’s $2.12 billion worth of OIBDA — a cash flow proxy — and subtracted off the $668 million one-time gain to get $1.74 billion, multiplied it by 23.9 and took 95% of that amount).
This calculation includes subscription revenue, which is declining, so it is arguably on the high side. Still, even if you shave off a few billion from my figure, AOL hardly seems worth the money for Google, despite some of the assets outlined above.
With Time Warner shares up only 1% this afternoon, this idea might be no more than a good headline.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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