Rumoured AOL-Yahoo merger would cause more problems that it would solve

As rumors about a Yahoo-AOL merger grow louder, industry experts caution that such a deal could create more problems than it solves.
Yahoo is likely pursuing the acquisition because it needs a short-term, sure-fire way to boost its value at a time when its stock is at a dangerously low point.

Buying AOL is one of the few ways in which Yahoo would be able to instantly increase its revenue and share in key segments.

Its board and top managers continue on the receiving end of heavy criticism for, in the view of their detractors, causing Microsoft’s acquisition bid to collapse.

Microsoft’s spurned offer of US$33 per share now looks extremely attractive with Yahoo’s stock trading between $12 and $13.

Meanwhile, AOL’s weak advertising revenue growth rates in the past year have been disappointing, falling way below the U.S. online ad market’s growth rates. Parent company Time Warner has been giving indications lately that it is open to divesting itself of AOL either by selling it whole or in pieces.

“It does seem like the environment, the circumstances, are conspiring to bring these two companies together,” said industry analyst Greg Sterling of Sterling Market Intelligence.

The shotgun marriage could end up being more detrimental than beneficial if it creates integration nightmares that derail key initiatives like Yahoo’s Open Strategy (Y OS) project and AOL’s years-long, painful metamorphosis from a dial-up Internet access provider to an advertising business.

Y OS, announced in April, is a long-term, complex project to open Yahoo services up more broadly to outside developers and to create for end users a single dashboard to manage their Yahoo services and online activities in general.
Yahoo executives have said that Y OS is key in the company’s efforts to recover its technology edge and be able to better compete in this era of social computing against rivals like MySpace, Facebook and Google.

“Yahoo is trying to be more like Facebook and MySpace, and clearly Yahoo should have been more like them to begin with,” said industry analyst Rob Enderle from Enderle Group. “I’m not sure AOL changes that in any way. Yahoo has always needed to figure out where it wanted to go and its problem has been to stick with the strategy of the moment in order to execute.”

Enderle would discourage Yahoo from trying to mesh the AOL products and services right away into the Y OS effort — doing so would likely disrupt the Y OS workflow, delay its progress and possibly cause it to lose its focus.

“A downside of mergers is that they can be distracting and, depending on what it is you’re doing they can slow down your execution in other areas,” Enderle said.

Because AOL has been paring down its menu of sites and online services, it now has a considerably smaller roster of products than Yahoo, so the best move would be to keep AOL operating as an isolated, stand-alone group that doesn’t interfere with big, ongoing projects like Y OS, he said.

On the advertising systems front, a combined Yahoo-AOL would create a mishmash of products that both companies have been trying, independently, to rationalize and integrate, processes that are very much ongoing.

“Certainly, there’s some logic to the idea [of a merger] from a business standpoint, but there are many complex integration issues that would have to be resolved for a merger like that to be effective,” said Andrew Frank, a Gartner analyst.

“It’s not clear to me how long and costly such an integration would be since both of these companies have made so many acquisitions [in recent years] that they haven’t fully integrated into their own architectures. That would be my main concern about the deal,” Frank added.
In addition, the overlap in operations would likely dictate severe workforce reductions that could hurt employee morale, which is already low in both organizations, especially at Yahoo, whose turnover rate in high-profile positions has been extensively documented in recent months.

AOL would be unlikely to solve the big problems that are dragging down Yahoo, including Google’s massive domination of search advertising and Yahoo’s need to become more nimble in its technology development and innovation.

“Buying AOL doesn’t necessarily help Yahoo very much in terms of fixing any real problems Yahoo is having,” Enderle said.

What a fusion would do is bring together two struggling Internet companies that have common goals, Enderle said. “AOL would be much better off as part of Yahoo than as part of Time Warner because in theory AOL is worth more to Yahoo than to Time Warner,” he said.

The acquisition would also eliminate a competitor and prevent Google or Microsoft from strengthening their menus of products by buying AOL, which Time Warner is openly seeking to get rid of, Enderle said.

On the regulatory front, since AOL and Yahoo are major players in display advertising, such as banner ads, it’s not inconceivable that the U.S. government might take a slow, close look at possible antitrust issues involved in a combination of the companies. “That’s a likely possibility,” Frank said.

Neither AOL nor Yahoo responded to requests for comment.

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