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 Investors are revisiting one of the most speculated Internet
combinations, after activist investor Starboard on Friday pressured
Yahoo to merge with AOL.
A pairing could help the companies compete in their core advertising
business. But even combined, they would remain but a shadow of the
Internet powerhouses they once were, analysts and advertising
experts said.
Cost cutting after a merger would generate plenty of savings, some
$1 billion, according to Starboard's analysis. Accelerating business
growth would be harder.
"Neither company is a leader in ad dollars, and other than cost
savings, there is little to gain by combining them," said Erik
Gordon, a professor at the Ross School of Business at the University
of Michigan.
DOING THE MANAGEMENT SHUFFLE
A merger would suck up a lot of management time as the companies
integrate staff and systems. In the meantime, the combined company
could fall even further behind the competition, said Gordon.
"You’ve saved costs and you’ve become a more efficient slow-growth
company," he said.
In mobile, a high-growth area in which Yahoo and AOL have both been
playing catch-up, joining forces would create little apparent
benefit, analysts said.
Yahoo and AOL have a meek and decreasing share of the digital ad
market, according to data from research firm eMarketer. Google Inc
is expected to command more than a third of the world's $140 billion
digital advertising spending this year, with No. 2 Facebook Inc
grabbing about 8 percent. AOL's share is less than 1 percent and
Yahoo's is 2.5 percent, both down from 2013.
SOME BENEFITS
Still, analysts and advertising experts think a tie-up would help
when it comes to video programming and newer, automated ways of
buying advertising.
Last year AOL made its biggest acquisition under CEO Tim Armstrong
when it bought an electronic video advertising platform Adap.tv for
$405 million. That technology could fit well with Yahoo's recent
efforts to deliver more online video programming, such as videos
about technology and fashion, along with old episodes of the
Saturday Night Live television program.
Both companies could benefit from combined content and audience,
said Amy Dickerson, vice president, director of digital at Spark, a
media agency owned by Publicis.
Pairing up would make Yahoo and AOL a strong No. 3 player in the
display advertising market, behind Google and Facebook, said Pivotal
Research Group analyst Brian Wieser.
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SIZE MATTERS
"The reason why Facebook's size and Google's size matters and helps
them so much is that they are a one-stop shop for so many
advertisers," said Wieser.
AOL's heavy investment in programmatic advertising that allows
marketers to automate the buying and selling of ads is another asset
that would help Yahoo.
AOL has been reaping the benefits. Last quarter, advertising
revenue, almost 75 percent of AOL overall revenue, jumped 20 percent
in large part to its programmatic efforts and Adap.tv acquisition.
Additionally, AOL ad pricing, meaning what it gets for each ad, is
growing while Yahoo's is shrinking, noted JMP Securities analyst
Ronald Josey.
"AOL is specifically doing better in their core business and Yahoo
has room for improvement for sure," he said.
Combining two online services is not a sure bet. Yahoo and Microsoft
Corp voiced similar logic when they struck a Web search deal in
2009.
With Microsoft technology powering searches and search advertising
for both companies, the partners hoped to mount a more competitive
challenge to Google, the world's No. 1 search engine.
But the boost in search advertising prices has failed to materialize
so far, and Yahoo has tried to slow the roll out of Microsoft
technology on its websites in certain countries.
(Reporting by Jennifer Saba in New York and Alexei Oreskovic in San
Francisco; Editing by David Gregorio)
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