PEs pause on AOL seeking to pouch Yahoo

Interest in AOL from private equity firms ramped up after it’s stock plummeted about 30 per cent on dismal earnings results last month. Problem is, private equity firms have now turned their attention to Yahoo, which is reportedly seeking its own sale after firing Chief Executive Carol Bartz on September 6 and attracting the ire of activist investor Daniel Loeb.

Sources said top-tier private equity firms that were looking at AOL are now setting their sights on the company famous for its purple logo and peppy exclamation point, viewing it as more valuable and housing more attractive assets than AOL.

According to industry sources, several PE firms have lines out to at least two media companies to see if they are willing to partner on a bid for all or pieces of Yahoo.
AOL and Yahoo are two vastly different business in terms of market value — roughly $1.6 billion and $19 billion respectively — meaning that there are different pools of potential buyers for each asset. The big private equity firms with massive amounts of money under management are able to go after Yahoo on their own or with a strategic partner.

The smaller private equity firms are better equipped to digest AOL and likely couldn’t pursue Yahoo absent being part of a consortia of buyers. Or, to put it another way, AOL’s second-class assets are now only attracting the interest of second-tier buyers. Indeed, only when compared to AOL does Yahoo come out the winner.

Compounding AOL’s problems is the fact that its lucrative subscriber dial-up business is also one of greatest liabilities. To make up for loss of subscription revenue, AOL is training its sights on advertising sales. But even that is having set backs. Its launch last September of a more expensive large ad-format with interactive panels that dominate a Web called Project Devil is still trying to gain traction on Madison Avenue.

Under Armstrong, AOL has also developed a penchant for investing in projects that have yet to pay out. Though expensive, AOL’s attention-grabbing acquisition of Huffington Post for $315 million is delivering returns since the business is profitable. Yahoo’s coming on the block couldn’t have come at a worse time for Armstrong. The former Google Inc ad sales executive has seen his reputation dented since taking over AOL.

According to industry sources, Armstrong’ reputation has taken as much of a hit as Bartz’s, even before he bungled the dust-up that resulted in TechCrunch founder Michael Arrington’s ouster.

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