Apr 10

## Is AOL Only Worth \$12.25 Billion?

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Here is some undoubtedly errant math from a former AOLer (me):

In December 2005, Google purchased 5% of AOL for just over \$1 billion, pegging its market value of about \$21 billion. The Washington Post ran this article today:

Murdoch and AOL Join Fight Over AOL

So, from the numbers in the article (notably all based on hear-say and conjecture), I did some back-of-the-envelope math:

Supposing first that Yahoo’s contention that the Microsoft offer of \$42 billion undervalues them, let’s give them a 7% markup, bringing their current value to about \$45 billion. From the article:

“Under the terms of the possible Time Warner deal, the AOL unit would become part of Yahoo. In exchange for AOL and an undisclosed sum, Time Warner would receive a 20 percent stake in the enlarged company, said the source, who cautioned that the terms were not final and that the deal could founder.”

I’m going to ignore the “and an undisclosed sum” to make my fuzzy math easier. Assuming the 80% of the new venture that Yahoo would keep reflects their current \$45 billion value, then the resulting entity would be valued at about \$56.25 billion. So, Time Warner’s 20% would be worth about \$11.25 billion.

Now, that probably does not reflect the full current value of AOL. Earlier in the article it states:

“Yahoo, meanwhile, is working out a complicated deal to acquire most of AOL from Time Warner, the world’s second-largest media company…”

I’m guessing the part they won’t buy is the AOL access (i.e., dial up) business. It’s not news that Time Warner is seeking a buyer for that already, but I haven’t seen any guesstimates of what the selling price would be if they can find a buyer. So, I’m going to pull a sale price out of my elbow (see – clean language Mom!) and say they could sell it for \$1 billion. That would give AOL a current market value of \$12.25 billion (under the deal outlined in the Post).

So, loads of fuzzy math aside, that means since the Google purchase in 2005, the value of AOL has dropped 40%. Let’s compare that to the TWX stock price. On December 21, 2005 (the day after the Google purchase was announced), the TWX closing share price was \$15.58. Yesterday it closed at \$14.43 – a drop of 7%. If what Google paid in 2005 was just, and the AOL value tracks with TWX overall (a great simplification), then AOL’s current value would be about \$19.5 billion.

So, if all the fuzzy math and conjectured prices in today’s article are correct, one (or more) of three things is true:

1. Google paid too much for its 5% stake in 2005, and/or
2. The other Time Warner divisions have compensated for the 40% drop in AOL’s value such that TWX overall value only dropped 7%, and/or
3. The deal speculated in today’s Post undervalues AOL by about \$7 billion

Given the conjecture in the post article, “In the unlikely event that both deals close, News Corp. and Microsoft would control Yahoo, MSN, MySpace and AOL…” and the fact that Google can decide to sell (or keep) its 5% of AOL this July, 2008 is going to be a very interesting year for AOL.

written by Jeff Kelly \\ tags: , , , , , , , , , ,

Feb 01

## Microsoft Hunts Yahoo – Is AOL Next?

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So the blogosphere is agog with today’s big news that Microsoft has made a \$44.6 billion bid to acquire Yahoo. I won’t pile on when so many others that have much more knowledge than I are busily chiming in. I will just say that I think this is just the first of many mergers and acquisitions we will see in 2008. There are too many duplicitous players out there and as the economy tightens, the strong will swallow the weak. Also, people are getting tired of having so many sites to keep track of (c’mon OpenID) that they will welcome a merger of some of their favorite social sites (can you say “MyFaceLinked”? – quick – go reserve the domain).

It did get me thinking about my old company AOL, however. Could they be on the radar for Microsoft to gobble up as well? Others have posited that Google might want to snap up AOL to strengthen their advertising sales force. That is certainly a possibility as well. But since I am way overdue to deliver some 2008 predictions, here is what I think will take place:

1. AOL is three different companies in one: the dial up subscription service, the Web services (publishing, media, IM, e-mail, MapQuest, TMZ.com, etc.), and the “Platform A” advertising business (anchored in Advertising.com).
2. Time Warner will not give up on Platform A. It recognizes the value of the online advertising business. It may decide to merge the “publishing” parts of the Web services with its Time Inc. publishing division. But the dial up business and the “services” part of Web services? I think they would be happy to find a buyer.
3. So, they sell the dial-up for scrap; merge their hot Web properties (MapQuest, TMZ.com, etc.) into a newly fortified Time publishing division; hold onto Platform A; and offer everything else (AOL portal, e-mail accounts, AIM, ICQ, etc.) to the highest bidder.
4. Who would want it? Microsoft? Google? Hard to say. But Google does have an inside advantage: they already own 5% 0f AOL. They purchased that for just over \$1 billion in 2005.
5. When does all this happen? In July 2006 – because that is when Google can exercise an IPO on the 5% it owns.

So, that is my shot in the dark. I will repost in August to see how accurate I was. ;o)

Let me know what you think…

written by Jeff Kelly \\ tags: , , , , , , ,