AOL Yahoo Buyout Talks Are Just Rumors

CNBC reported late yesterday that Yahoo was on the Auction block amid rumors about AOL teaming with private capital to buyout the Internet giant. Looks like those rumors were unfounded according to a New York Times article, but they did have a positive effect on Yahoo’s stock price in aftermarket trading yesterday.

The deal chatter Thursday morning is centering on reports by All Things D and The Wall Street Journal that buyout firms are contemplating teaming up with AOL or the News Corporation to buy Yahoo. (Shares in Yahoo jumped nearly 15.8 percent in after-hours trading to $15.25.)

But hold on a moment: A deal is not happening anytime soon.

The trial balloon in the press is coming from a handful of bankers and investors who have tried to gin up interest in a deal for months. And at least a few of the named “suitors” in the Journal’s story, like the Blackstone Group, have already passed on the idea.

More importantly, Yahoo first heard about the rumors from the press and its own bankers at Goldman Sachs, according to people close to the company.

That doesn’t mean bankers haven’t been running the numbers. And companies like AOL and the private equity firm Silver Lake are intrigued with the idea. AOL’s chief executive, Tim Armstrong, would love to find a way to merge both companies to generate more scale in the display advertising business.

But making a deal work would require fancy footwork and risk. AOL’s market value is about $2 billion, while Yahoo’s is now about $20 billion — before a premium.

The back-of-the-envelope math requires that Yahoo sell its 39 percent stake in Alibaba, considered one of the company’s biggest and most desirable assets, which could be worth $12 billion. That would put Yahoo closer to a more-reasonable $8 billion, again before a premium.

But Yahoo believes that Alibaba will fetch more in a public spinoff down the road than in a sale now, so why sell now? And while Alibaba would love to buy out Yahoo’s stake in itself, such a move would require the Chinese Internet company to raise yet more capital, raising the potential price of a deal. (The two sides ended the most recent round of talks in June.)

Don’t forget as well that Yahoo’s chief executive, Carol Bartz, believes she can turn around the company — as long as she’s given some more time.

It’s possible that the emergence of the reports will prod a sale process along, at some point down the road. But for the moment, talk of a deal is still pie-in-the-sky.