Forget Yahoo, Microsoft should acquire AOL

After today's announcement that AOL has acquired Bebo for $850 million in the hopes that it will be able to capitalize on the upswing in social networking, I had a thought. Knowing that AOL is trying to get a deal done with Yahoo and the company owns some solid properties, why doesn't Microsoft forget about Yahoo for a while and acquire AOL?

Sound crazy? If so, consider the fact that AOL has quickly become one of the largest competitors to Microsoft in its attempt to acquire Yahoo and at the same time, it's barely standing on the backs of sound editorial content from Weblogs, Inc. and now, social networking -- two areas Microsoft currently has no influence in.

In essence, the deal for AOL would be a good one for Microsoft and could actually help it in its negotiations for Yahoo. Here's why:

Reason 1: Complementary services

At face value, a deal between AOL and Microsoft may not look like the match made in Heaven some are calling the possible Yahoo deal. But when you take a slightly more comprehensive view of what's really going on, your opinion might change.

As it stands, AOL now owns Weblogs, Inc.; TMZ.com; Bebo; Quigo, an advertising firm; Third Screen Media, a mobile advertising firm; and a slew of other advertising companies that could have a major impact on the business going forward.

And although the company is operated by Time Warner, which has done all it can to make the merger worthwhile, the online firm is somewhat independent from its owners (Google also owns a small stake) and offers a wide array of services that have been neglected by Microsoft.

Now, I'm sure some would try to make the argument that Microsoft only wants Yahoo for search, but I'm not so quick to agree. If that's true, is all of Yahoo's "extras" just a bonus of acquiring the company? Microsoft has made a number of statements in the past saying that it wants to do more on the Internet and offer more compelling services and acquiring AOL is the first step in doing just that.

For the first time, Microsoft could be a major player in the social networking space with Bebo and have sound editorial content turning a profit. Aside from that, AIM, which is the most popular IM'ing tool in the US, will be a great tool for Microsoft, considering MSN holds that title pretty much everywhere else in the world.

Reason 2: It makes Yahoo worry

There's no debating the fact that Google will never acquire Yahoo and I'm of the opinion that Microsoft never will either. That said, Yahoo wants to be acquired by a company and although it has said numerous times that it actually feels quite opposite, I think it's full of hot air.

A Microsoft acquisition of AOL would throw Yahoo off its mark and send panic through the entire company. In just one day, Yahoo's stock price would sink to an unprecedented low and Jerry Yang would be forced to come out for damage control.

And considering the fact that Microsoft would probably be willing to pay about half as much for AOL (about $22 billion), Yahoo would certainly worry that its time is up and it lost its chance to court a serious buyer.

All the while, Ballmer and company could scheme to find ways to continue its proxy fight and install a board that's far more likely to accept a sweetheart deal from Microsoft. In the process, Microsoft could walk away with both companies. Just don't expect it to happen overnight. In fact, I would guess that an AOL deal would put Yahoo on the back burner for about a year.

Reason 3: AOL will come cheap

Let's face it -- even though the company has the kind of cash to acquire Bebo for $850 million, AOL is in rough shape. It's in a transitional phase that it's having a hard time breaking out of and it has made a number of poor decisions that have hindered its growth.

That said, it's still an attractive company from Microsoft's standpoint and all of its properties account for a boatload of pageviews each day, which could easily translate to an advertising revenue stream that is not only controlled by Microsoft and thus blocked from Google, but highly lucrative.

The Microsoft-AOL deal would probably look quite similar to its pledge for Yahoo and an offer would be made where half of it is payable in cash and the other half would be offered up in Microsoft stock. And considering the fact that AOL is probably about half as valuable to Microsoft as Yahoo, there's no reason to suggest it wouldn't offer about half as much. Of course, that number would probably rise into the $30 billion to $35 billion after negotiations were complete. That said, that figure isn't too bad of a deal for Microsoft and one that would conceivably bear fruit almost immediately given the fact all of AOL's properties (aside from its advertising ventures) are running on all cylinders.

At this point, AOL looks far more attractive to Microsoft than some may believe. And although the chances of it acquiring the online firm are low, it wouldn't be a bad idea and one that's certainly worth considering.

[millennian7]

AOL should buy the better parts of Yahoo, MSN and Microsoft development, and let the rest drift into cyberspace... Maybe Bill Gates should, too!

[Rick Cavaretti]

Like we need a mega-gigantic portal that generates its revenue thru yet another endless stream of advertising. Just like in the old days, I wish I could fast forward thru the commercials like on my old vcr.

[make_or_break]

It won't happen because it would be cost-prohibitive, courtesy of that little outfit called Google. AOL and a large chunk of Google's revenue stream are tied at the hip, and Google won't let that go without a major fight. MSFT might still win out, but the Google will definitely make them hurt for the privilege of owning that GOD (grand old dinosaur).

[doclandis]

I like the idea. I still like, and use AOL; I suppose more out of habit than admiration of its offerings. But MS could use the user base, and the ad revenue to ramp up its own presence here in the U.S.

[samgar2]

If Microsoft acquires AOL, the existing AOL services will become more popular, certainly outside the US, where AOL has no costumers at all. This will make Yahoo! become less popular and it's value will go down pretty fast. Yet, Yahoo! still has the services and the technology, so that Google will buy Yahoo! at a small price. This way, Google will all of a sudden offer better and more services than Microsoft (AOL), and because of Google's popularity, it will very catch up with Microsoft and grow bigger very quick because of the advantage in tech, knowhow and services. This way, Microsoft will yet again fall out of competition in online services and Google will reign alone. This is why Microsoft should and will buy Yahoo!. It's the only way to stay in competition and keep Google from becoming te only big provider in online services. If Google would buy another online service provider, they would be pushed towards the less interesting AOL, so that they would become big, but not as big as if they would have purchased Yahoo!. They would become popular enough anyway, because they are Google and people like Google.

[microsoftprincess]

If you thought the government would look into anti-trust issues over the Yahoo deal, can you imagine whatw ould happen with AOL? The simple fact is that AOL is owned by Time-Warner, and Yahoo is a stand alone. AOL has been increasing its share, and Yahoo hasn't. Besides, Jerry Yang, co-founder of Yahoo and current CEO hates Microsoft. So it's more fun to take over your arch rival than someone you play well with in the sandbox. -Microsoft's Princess (Melanie Gass)