Time Warner gadfly Carl Icahn has peed all over the AOL-Google deal, worrying that it might prevent AOL from pursuing a more shareholder-friendly tie-up with the likes of Yahoo!, MSN, eBay, or IAC. And, as always, he has yet again threatened to hold Time Warner board members personally responsible.
I'm all for dissident shareholders, and, until recently, I've been mostly all for Carl Icahn, but he is beginning to sound like Johnny One Note. With this latest salvo, moreover, he's wrong.
Just a few days ago, Icahn was quoted as saying that he and Time Warner CEO Dick Parsons were just a couple of guys from Queens who knew nothing about the Internet. Today, he's online expert enough to suggest that AOL (or at least AOL shareholders) would be better off with almost anyone else. In support of this, he invokes a Goldman Sachs report arguing that the best AOL marriage would be with eBay or IAC.
Give Goldman credit for originality, but strapping AOL to eBay would be like hanging a concrete block around the neck of an eagle. eBay has problems, but they wouldn't be fixed by adding a massive dying revenue base and thousands of employees in an entirely different business--and eBay's assets certainly wouldn't fix AOL's problems. If well-executed, the Skype-AOL connection would be a good one, but the companies don't have to merge or exchange equity to strike a deal like that.
As for IAC, AOL might be "complementary" in the sense that IAC doesn't have any business that looks like it (although they have almost every other business). But "complementary" in this sense would not save AOL from being the No. 3 or No. 4 player in a market that will likely only support three players at most. The only way out of that trap is to switch businesses (easier said than done) or partner/merge with one of the other three.
What Icahn is really up in arms about is a potential loss of flexibility from the Google deal: Too tight a partnership, he worries, and Time Warner will lose the ability to pawn AOL off. This view ignores a few critical points:
First, in its current state, AOL is dying. Without a deal like the one with Google, which should turbocharge AOL's traffic (at least temporarily), the company will slowly bleed to death. If Time Warner cowers in fear of Icahn and does nothing, therefore, the amount the hypothetical buyer will be willing to pay for it will likely decrease by the day. If a deal like the one with Google can help turn the company around, however, then AOL's value will jump--something that will be recognized by the market, whether or not the company is sold.
Second, a deal with Google should deter no buyers except, perhaps, MSN and Yahoo!, and even these two could just buy out Google and insist on a renegotiation of the partnership terms (if they didn't like the deal, which seems unlikely).
Third, the Google deal will not harm Time Warner's ability to spin AOL off in an IPO, an event that should "unlock" at least as much value as a sale (although I'm not convinced that the market is wildly undervaluing AOL within Time Warner, contrary to the opinions of most observers).
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Posted by: Network | December 15, 2010 at 07:42 AM