Can AOL Really Buy Yahoo?

Have you heard that private equity firms have held talks with AOL executives about a possible combination with Yahoo?


Of course you have. Just about everyone with even the slightest interest in financial markets or technology has heard of these talks. And that’s the point.

According to the Wall Street Journal, the talks have been between Blackstone, Silverlake and AOL. No one has officially approached Yahoo about the deal. In fact, Bloomberg is reporting that Yahoo hired Goldman Sachs to “defend against possible takeover approaches.”

Got that? Not only is Yahoo not a party to the deal talks. It’s actually hiring investment bankers to strategize ways to fend off would-be buyers. So how did this “deal” wind up all over the Wall Street Journal.

Here’s what I think happened. The private equity guys made some overtures to Yahoo , which reacted by lawyering up and hiring Goldman Sachs . The message was clear: we’re not for sale.

So the private equity guys decided to force the issue by making their interest public. The hope is that the jump in the price of Yahoo stock will create pressure on management to be more receptive to a deal. Shareholders will see the jump and demand that Yahoo’s Carol Bartz at least sit down with AOL’s Tim Armstrong, the private equity guys told themselves.

Guess what? This almost never works. If anything, Yahoo’s management is probably less inclined to cut a deal with AOL now. Bartz likely perceives this as a hostile takeover attempt. Regardless of what shareholders want, corporate law gives management wide leeway to turn away offers.

A combination of AOL and Yahoo may make economic sense. But I wouldn’t be surprised if today’s news turns out to be a contrarian indicator telling us that this deal will not happen.

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