Buy Bebo? Better to just dump AOL

Why does AOL have a thing for acquiring companies with silly names? (Last month, it bought widget maker Goowy.

My colleague Dan Farber weighed in earlier Thursday on whether Bebo can "save" AOL, a question that remains impossible to answer in the near term.

Truth be told, I've compiled a stack of old magazine articles since the turn of the century (I love saying that phrase) detailing the "challenge at hand" for, first, the merged AOL Time Warner and then Time Warner, which dropped AOL from its moniker in 2003. At a certain point, however, you have to wonder: why bother?

After the merger with Time Warner, Steve Case and his henchmen at AOL made out quite nicely. But nearly everybody else, including millions of investors, got screwed in what subsequently became reviled as the most idiotic dot-com deal in history.

And so with the Bebo news, we're once again back to asking whether AOL can be fixed. It's sort of like putting lipstick on a sow's head, at this point.

CEO Jeff Bewkes may be an accomplished executive--as was his predecessor, Dick Parsons--but he'd have better luck cleaning up the Augean stables. AOL has been a huge stinker, and nothing management comes up with has stopped its slow state of decay. Too many opportunities have been squandered, too many shifts in technology missed.

Don't look to the corporate M&A types for a way out. These guys always come up with the same tired prescriptions, but they can't buy their way to success. Before today's announcement, management had spent more than $1 billion on acquisitions to revive AOL.

There isn't much, so far, to show for their labors. The New York Times recently described the dysfunctional corporate culture at AOL, where shouting matches regularly break out. If that's not a telling harbinger, what is?

At a certain point, you have to ask whether throwing good money after bad is really the best idea. It's time for Time Warner to give up a failed experiment.

Update at 10:37: Over at All Things Digital, Kara Swisher has a insightful take on what AOL actually is getting for all those shekels:

According to the several sources who were privy to Bebo's financials, for example, Bebo's revenues for 2006 were only $7 million with $3 million in EBITDA (earnings before interest, taxes, depreciation, and amortization). In 2007, the results are still small, with $20 million in revenues and $5 million in EBITDA.

Using 2007 results, that means AOL paid a handsome 42.5 times revenues and an incredible 160 times EBITDA. AOL might assert that it makes Bebo a bargain, given (that) Facebook got valued at 50 times revenue when it got that $15 billion valuation from the $240 million investment from Microsoft last year. Still, Facebook has a huge presence in the U.S. and is growing strongly in Europe, including being just ahead in Bebo's strongest territory in the U.K.

Projecting outward, the company estimated--remember, these are not actual numbers, but a best guess by Bebo execs--it would have $50 million in revenue and $10 million in EBITDA in 2008; $117 million in revenue and $48 million in revenue in 2009; and $193 million in revenue and $92 million in EBITDA in 2010.

If Kara's guesstimate is close--and she's a reliable reporter--then AOL is paying through the nose for another Web 2.0 property that has a way to go before ever justifying the original purchase price. Assuming it ever does.

Read more of News.com's coverage: "What Bebo means to AOL"

[mtins65]

AOL IS A LIBERAL ANTI- FRIST AMENDMENT WEB SITES,THATS WHY THEY ARE GOING DOWN THE TUBES!

[gregorytga]

mtins65: Yes, you sir are the culmination of Web 2.0 culture run amuck giving voice to the idiot; void of an intelligent posting or incapable of formulating logical feedback. I salute you for this level of ignornance is almost avant-garde.

Charles: I have to agree, the AOL purchase seemed evident even at the time that their relationship where AOL stood only to gain and Time Warner stood only to lose.

[charlie cooper]

gregorytga .... i remember getting the call from our east coast bureau when the news hit the wire. if memory serves, it was around 3 in the morning, pacific time. well, with 20-20 hindsight i suppose we're all clairvoyant but i remember a lot of people at the time commenting the deal actually made sense. could it have worked had there not been a dotcom collapse and with different management in charge? a moot question now and bebo sure ain't going to change any of that. btw, i updated my post with a link to kara s who came up with some interesting numbers relevant to the deal.

coop

ps: hats off to john dvorak who, the week of the announcement, panned aol-time warner as the dumbest deal ever.

[mtnsmiles]

Can someone enlighten me? Please explain WHY a company with a forecast of $92mil EBITDA in 2010 can sell for $850mil today. I just don't get it. How is the valuation done? What am I missing?