I’m going to make my prediction now, if the merger between AOL and YHOO goes through it will be a drag on the latter. This joining of two nags won’t mean the creation of a thoroughbred.

While YHOO has plenty of attractive qualities, AOL will never be mistaken for the bell of the ball. The company is a big bundle of something valuable but no one can quite sort out how to put it to work for them. YHOO has a tough enough time monetizing the online assets that they have right now and while in many ways this is a high class problem it is also a high priced one when considering the dollars frittered away in lost opportunity. Taking on and sorting out these issues at AOL as well seems to be a fools errand and smells somewhat desperate.

 

Strangely though of the three in this ménage a merge, MSFT, AOL and YHOO; YHOO seems to be the one company that has an inkling of how revenues are created in cyberspace. While MSFT has successfully moved into gaming, this industry is fairly retro, economically speaking, an old economy business of video gaming that still relies on big box and department stores. Otherwise they are long in the tooth when it comes to creating cash out of the bits exchanged over the Internet. They can though sell their bits for big bucks, whether they be XBOX’s or Windows, as atoms in the aforementioned brick and mortar stores. This is why MSFT and YHOO make sense and AOL is the odd man out. But the YHOO people and the MSFT haters won’t see it that way.

So here is my prediction, if YHOO and AOL join it will result in a sum that is worth much less than the value of its parts. This will be the time when smart investors will look for the entry point. Devalued the company created Frankenstein like from YHOO and AOL will be much more attractive to MSFT, even after being spurned. To make the deal stick with the U.S.G. they will have to spin off AOL, hopefully in an eighties style parting out and selling off of pieces (did I mention I don’t like AOL even in its weakened and benign state – probably even less because of it.) The result will be what should have happened in the first place, a much stronger MSFT with the addition of YHOO. For YHOO the only thing to do is wait.

~JG Hitz