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Two Years and Still Stuck in a Revenue Rut, Will Yahoo's Mayer Bite the AOL Bullet?

Maybe the struggling pair will merge. Maybe not. Maybe they should. Maybe they shouldn't. That's not the real issue.

Maybe AOL and Yahoo will merge. Maybe not. Maybe they should. Maybe they shouldn’t.

But for the erudition of reporters who skulk outside of bars at high-profile mogul events, it’s very unlikely that AOL’s CEO Tim Armstrong and Yahoo’s CEO Marissa Mayer were plotting the merger between the two companies last week in Sun Valley at the famous Allen & Co. conference there.

That did not stop the heedless speculating, of course, including in The Wall Street Journal, in reporting apparently based on a cocktail.

“Was it just two old colleagues having a late-night chat or a prelude to more serious business down the road?,” reported the once staid business newspaper breathlessly, using terms like “wee hours,” as other moguls “sauntered off to bed” while the in-plain-sight pair were chatting away in the resort bar.

I am still blushing: “The tête-à-tête could be nothing more than former Google executives catching up. Sun Valley isn’t all about deal-making, after all.”

After all, indeed not! It’s also about for-lack-of-any-real-news stirring up the deal pot, just because some Wall Street types think it is a good idea to mash the two companies together in a new configuration that might or might not make sense.

(Even Re/code allowed this AOL-Yahoo scenario to be contemplated, making sure it was clearly someone doing some kibitzing only.)

But, since I prefer reporting instead of, you know, guessing, here’s what I know now on this particular deal:

  1. Armstrong would dearly love to merge with Yahoo and has — in only sideways ways so far — brought it up to many, including Mayer, according to numerous sources. In his mind, AOL and Yahoo have very similar businesses and could easily combine them.
  2. Internally at both companies, this is not seen as a completely bad idea — both share numerous advertising overlaps, content overlaps, video overlaps and too many employees doing the same thing. In addition, Mayer could certainly use a decent exec she actually knows well like Armstrong at the top (presumably, him CEO, her chairman).
  3. Yahoo can certainly afford it once it gets its piles of cash from the August IPO of Alibaba Group. As most know, Yahoo has to sell a chunk of its stake in the offering, giving it more than the $3.2 billion it would need to purchase AOL.
  4. The idea of a merger between Yahoo and AOL has been much bandied about for a very long time. In 2008, for example, with other leaders in charge, the idea was discussed in a deal in which Yahoo’s codename was Yale and AOL’s was Amherst, after the two colleges. The concept reared its head briefly again during the Carol Bartz regime, before she quashed it dead.
  5. But wait: Mayer has told a number of people inside and outside the company that she just does not “get” the merger, despite all the potential benefits. As explained to me, she finds it small, unexciting, uninspiring and backward-looking. Mayer has a point.
  6. That said, Mayer has also said to many — sources said! — that she would like to get her paws on AOL’s flagship content brand, the Huffington Post. This also makes sense — by the way, Yahoo once considered buying it just before AOL did in 2011 — since it follows along Mayer’s current content model. Also: Arianna!
  7. Armstrong is not selling Huffington Post separately, not today at least.

That leaves the situation squarely in Mayer’s court, as she continues to try to figure out how to goose Yahoo’s revenue, now two full years into her regime. It’s an issue she has to be thinking hard about, given she has few big moves at this point that bigger players cannot match.

More to the point, Mayer has a business that is still hurting — despite her best efforts at buying up cool startups, making splashy content hires and such — suffering largely due to the swift and dramatic changes in the online advertising market Yahoo has not kept up with.

(Another aside that’s been bugging me: What does Mayer’s oversleeping to one ad dinner in France have anything to do with this problem? I was also handed this vicious “tip” and decided quickly to pass, mostly because about 53 male execs I know have missed meetings and I was not sure what her jet lag has to do with Yahoo’s deeper and more structural troubles in the ad tech space.)

Those ad problems and the lack of new growth business is Mayer’s dilemma and for Yahoo it still comes down to financials.

And the results for the second quarter — set to be announced tomorrow after markets — are still very dicey on the revenue side. With earnings of 28 cents, Wall Street is estimating that Yahoo’s revenue will fall five percent to $1.08 billion for the period.

Yes, down again, a situation Mayer has found herself in quarter after quarter. Going backward: Less than one percent in the first quarter, six percent in the fourth quarter, five percent in the third quarter and seven percent in the second quarter.

Still, a big chunk of analysts are rating the stock a buy, largely due to the Alibaba money coming in and the likely boost it will continue to give Yahoo in the months to come.

After Mayer gets the money, though, it’s anyone’s guess. Well, not exactly — I have done even more reporting on what shareholders want her to do with the cash and what kinds of things she will be able to do.

More on that tomorrow — presumably after cocktails.

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