AOL explores possibility of Yahoo merger

by Kelly MacNeil on October 15, 2010

For the second time in less than three years, Yahoo finds itself involved in an high profile buy-out talks. The Wall Street Journal reported Wednesday that AOL and a collection of private equity firms were considering making an offer to buy the popular search engine. Spokespeople for both AOL and Yahoo have declined to comment on the matter.

In light of the rumors of the buyout, Yahoo stock rose considerably on Wednesday to $15.90 a share. According to sources familiar with the matter, one of the proposed scenarios would include a complex deal in which AOL and Yahoo would combine operations, and Yahoo would sell back nearly 40 percent of its stock in the China’s Alibaba Group – in which it has invested roughly $10 billion.

The merger would help allow the two companies to compete with Google while also increasing their advertising business, which has struggled in recent years. Although it’s a bold move, some industry analysts are saying that it may do little to help both companies.

“I don’t know that just making them bigger does anything. I don’t know that making them smaller does anything,” Pacific Crest Securities analyst Steve Weinstein told Reuters. “Operationally that does nothing, that’s just moving the pieces around the board. If someone were to come in and buy Yahoo, they better come in with a better idea in terms of how they’re going to grow it.”

Despite the misgivings, some shareholders are encouraged by AOL Chief Executive Tim Armstrong’s experience as a highly respected executive at Google. Still, Yahoo has found it difficult in recent years to adjust to the changing face of the Internet since the advent of Twitter and Facebook, as page views have been declining in recent months.

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