Too many rumors could spell trouble for AOL

No sooner did investors ring in the new year than they were confronted with, yes, another AOL rumor.

Shares of the Internet company jumped as much as 7 percent in early trading Tuesday after a news report that telecom giant Verizon was in talks to acquire the company. The stock retreated later in the day after Verizon's CEO, Lowell McAdam, dismissed the report as "inaccurate," though it still closed up about 3.4 percent for the day.

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The volatility was nothing new to AOL shareholders, who have seen the stock respond to never-ending rumors of a merger with rival Yahoo in recent months and years. Indeed, investors have responded to any whiff of deal talks, such as a moment last summer when AOL CEO Tim Armstrong and Yahoo CEO Marissa Mayer were seen sharing late-night cocktails at a tech and media powwow in Sun Valley, Idaho.

More recently, activist investor Starboard Value wrote a letter urging the two companies to merge, fueling more discussion among large AOL and Yahoo shareholders interviewed by CNBC.

Lowell McAdam, Verizon, and Tim Armstrong, AOL
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Lowell McAdam, Verizon, and Tim Armstrong, AOL

Where did the rumors come from? Two Yahoo shareholders told CNBC that Armstrong has discussed and even endorsed the idea of a merger with Yahoo in recent months, though they said Verizon hadn't come up.

A person close to AOL denied that the Verizon deal talk had come from within the company. "AOL is growing consistently with leading content brands and platform assets in the fastest-growing areas of the space so it is not surprising that the rumor mill is swirling, but the strategy remains focused on building great content, ad experiences and partnerships, not on being acquired," the person said.

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Too much rumor talk is never a good thing, investment bankers say. "If you think the leak is coming from the company, it's going to put off potential acquirers," one banker not involved with either Verizon or AOL said. "You'll be afraid that the second you start talking the stock is going to move up and they'll want a premium on top of that," the banker said.

And of course, investors also grow tired of rumors that don't come to fruition. "You don't want this to happen repeatedly," one AOL shareholder said.

There's plenty of rationale for a Yahoo deal and many shareholders would love to see it happen. Starboard and Wall Street analysts have said a merger with AOL could yield $1 billion or more in annual cost savings. The two companies have large advertising sales forces that currently compete with each other and could stand to shrink. Yahoo shareholders say the company has been resistant to doing a deal, instead focusing on a tax efficient way to divest its large stakes in Alibaba Group and Yahoo Japan.

Verizon, on the other hand, may want to venture further into content. If it acquired, say, TV or movie content it could use AOL's savvy to attach video advertisements.

"By partnering with Verizon, we believe AOL could accelerate its mobile penetration," JMP Securities analyst Ronald Josey wrote in a note. "Similarly, we believe Verizon could benefit by offering AOL's content to its users while benefiting from AOL's advanced programmatic advertising solutions."

Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.