Microsoft is quietly readying a plan to make a purchase of the combined Yahoo–AOL, should Yahoo pull off its plans to acquire the struggling America Online unit, according to sources close to AOL — via the menage-a-trois with AOL.
Microsoft was rebuffed earlier this year when it tried on multiple occasions to buy Yahoo. However, the odds are growing that a chain of events could lead to the Microsoft-Yahoo marriage after all.
Spokespeople at Microsoft and Yahoo declined to comment. A spokeswoman at AOL did not return a phone call and email.
But here’s why it makes sense. Increasingly, word is that Google is going to have trouble upholding its advertising deal with Yahoo, because anti-trust regulators are concerned about the market dominance the deal gives to Google and there’s a very strong chance they’ll reject it. A decision could be made by the Justice Department next week. If that happens, Yahoo’s stock will take a massive hit: One reason Yahoo’s stock is as high as $19 is because of the extra revenues it says it’s getting from the Google deal. Yahoo’s stock could plunge to say, $15, if the Google deal gets rejected. That’s because investors will turn even more bearish on a company that seems strategically adrift.
That would make Yahoo even more desperate to do a deal with another company. While Yahoo’s founder and CEO Jerry Yang has made it clear he does not want to merge with Microsoft, it’s obvious a deal with AOL is more palatable. Indeed, Yahoo’s new board of directors has initiated more talks with Time Warner over a possible merger with its America Online unit, something we confirmed last night. And investor Carl Icahn, now on Yahoo’s board, has been very vocal about Yahoo needing to do a deal. Moreover, AOL appears more desperate than ever to do a deal. Its business has continued to deteriorate. Time Warner said AOL’s ad revenues declined 16 percent to $1.1 billion in the most recent quarter, compared to the same quarter in 2007. So the odds of a Yahoo-AOL deal going through have gone up significantly over the past couple of weeks.
And with Microsoft desperate to do a deal — it wants to compete with Google in online advertising — there’s nothing stopping it from bidding to take over an even more attractive duo of Yahoo-AOL.
[Update: Why wouldn’t Microsoft just buy AOL? Well, Google has a significant “trigger” on AOL, via its advertising arrangement and 5 percent ownership stake in that company — something that would be less complicated for Yahoo to get around, given its relationship with Google. Google would let Yahoo buy AOL because the AOL-Google search deal would simply be folded into Google’s deal with Yahoo. If Microsoft were to try to buy AOL directly, Google would be threatened (Microsoft would kill the AOL-Google search deal). And even if Google doesn’t have the power to reject a Microsoft acquisition outright, it could make things very difficult.
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Note: Of all the players, AOL is the most desperate, and so it’s entirely possible this surfacing of a potential Microsoft mega acquisition is being sponsored mainly by AOL and its bankers in order to whip up enough frenzy to make sure something happens.]
Combined, the three companies (Microsoft, Yahoo and AOL) would still only have about a 25 percent share of the search advertising market, and so it wouldn’t be so large that regulators would be concerned about search dominance. Search still makes up the vast majority of the overall online advertising market, at about 60 percent, and so Google’s dominance of that search market (it has 65 percent market share) is what regulators are most concerned about. Display advertising represents about 40 percent of the market. Granted, the trio of Microoft-Yahoo-AOL would be the market leader in display advertising, and this could potentially draw its own scrutiny, but there are other players in this market, for example, Fox, increasingly Google, and newcomers like Facebook and Glam.