Will AOL go private?

By Felix Salmon
August 31, 2011

Some companies are in growth businesses; the stock market, as a rule, tends to love them. Other companies are in an inexorable secular decline; they tend to get punished by equity investors. There’s a good reason for that: stock-market investors are looking for stocks which go up over time, rather than stocks which are going to zero while paying out as much in dividends as they can along the way.

If you want an example of a business which is in a certain secular decline, it’s hard to come up with a better one than AOL’s hugely profitable dial-up business. And so it makes a lot of sense that, as Claire Atkinson reports today, AOL is looking at the idea of going private — perhaps with a sale to KKR. This is not a particularly revolutionary idea: Jonathan Berr has pushed it, and Bloomberg called it AOL’s “last, best hope”. AOL is on the record as having hired the most high-powered M&A advisors in the world; they’re no idiots, and only idiots wouldn’t look at a buy-out option for a company trading at a significant discount to its book value.

If I were a potential private-equity buyer, though, I’d do a sum-of-the-parts analysis and rapidly come to the conclusion that Tim Armstrong’s strategy is too much risk for too little potential reward. Take AOL, and sell off the non-core assets — things like Moviefone, MapQuest, AIM, and Advertising.com. What’s left? The AOL/HuffPo traffic-and-content monster, on the one hand, and the dial-up business, on the other. Armstrong’s idea is that you use the cashflows from the latter to beef up the former, so that when the dial-up revenue eventually disappears, the dial-up caterpillar has transformed itself into a glorious web-publishing butterfly. (Sorry, MSN.)

The problem is that the transformation from caterpillar to butterfly is extremely inefficient — there’s a lot of work and energy involved, to achieve a result which can be fleeting and fragile.

Now private-equity shops are actually a good place to quietly work hard on putting exactly that kind of strategy into effect. Without being distracted by the need to produce strong quarterly results, executives can concentrate on building businesses which are going to be worth lots of money over the long term.

But there’s no precedent for the idea that throwing hundreds of millions of dollars at a web content company will make it big and strong and self-sufficient. Expensive web content is expensive, especially when you’re trying to build out a network of thousands of locally-staffed sites. Meanwhile, profitable websites tend to be run on the cheap — including HuffPo, before it was bought by AOL. If I wanted to make a long-term for-profit investment in a website built on the genius of Jonah Peretti, I’d choose BuzzFeed over HuffPo any day.

So the ruthless logic of the market would seem to imply that the best thing to do with the dial-up business and the content business is to tear them apart. The dial-up business, on its own, is ripe for a managed decline, where you extract as much money as possible before it finally dies. Private equity companies do that kind of thing very well.

Meanwhile, the content business is still attractive, to someone — probably Yahoo, is my guess.

There’s a lot of deals to be done here, then. But the easy way to do it would be to simply sell all of AOL to KKR right now, at an attractive premium to the current share price. Then let KKR sell off all the content bits and pieces to Yahoo and/or others, leaving it with a dial-up business throwing off lots of juicy, high-margin cash.

Would Tim Armstrong do such a deal, though? That’s the big question. AOL’s share price — $15.68, this morning — is well below the $27 at which he took the company public at the end of 2009; his tenure there, if he sold the company for a price somewhere in the $20s, is likely to be considered a failure. So then it’s worth looking to how tough-minded AOL’s board is. Any insights on that front?

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Comments
7 comments so far

I hope somebody like KKR buys AOL. The private equity crowd is part of the population that has extracted far more value from society than they have contributed. Buying AOL would be a way for them to give some of that parasitically extracted wealth back, kind of like Fox did with their MySpace acquisition.

Posted by KenG_CA | Report as abusive

web content is expensive, but it’s all breakable;

you’ve been blogging recently about differences in online paywalls, and I just wanted to add that the ft’s is easily breakable as well. When they show you the authorisation box, in the url bar appears code that says
?authorised=false.html and then a whole “string” of nonsense. If you just change that to
?authorised=true.html, you don’t have to pay to read the ft either.

I think huffpo together with patch.com are the future of aol’s business, and I could imagine them selling a lot of their 90s business model so they can focus on growing into a free content oriented internet, which even the nyt and ft are not ready for. Mapquest and AIM go well with a focus on local news, as to be honest does moviefone. sell the company, except for the online local news business that aol wants to start, but make sure huffpo patch integrates with all those valuable services (mapquest, aim moviefone), and aol would have few to no costs within a company perfectly positioned to attack local newspapers with online local blogging. and they could even be a private company again.

Posted by theinfamoush6 | Report as abusive

Great post. Question for Felix: Other than convenience/it “seeming” to make sense, is there any good reason for AOL to be investing the money from the declining access biz to try to build an online media company, giving how low-reward that business has been for many others?

I mean, couldn’t you make a case that AOL would be better off using the money to transform itself into a REIT by paying cash for busted condo projects in Miami Beach, renting them out to generate cash, and then maybe selling them when the real estate market there rebounds?

I mean if the goal of a public company is to generate ROE — which it is — online content just seems to be a strange business to be in. . .

Warren Buffett once said — paraphrasing — that the market of a dying business is one that no one would start if it didn’t already exist. AOL would seem to be a classic example of that, no?

Posted by ZacBissonnette | Report as abusive

Agree this is a great post, nicely sums up the situation. Too bad a break-up of the business for the benefit of the public shareholders, who might realize as much as $30-40/sh in value, isn’t on the table. Instead, the Board seems content to entertain lower offers from others who will realize that value at the expense of current stockholders (even adjusting for risk and time).

One can only hope Mr. Armstrong puts current shareholders ahead of any personal motivations to remain a public company CEO or to salvage his track record through value-destructive undertakings.

Posted by DigitalMediaGuy | Report as abusive

Wait, AOL is still around? Who knew?

Posted by Moopheus | Report as abusive

Hey they could make a ton of money off a reality show “Arianna and KKR” Imagine what it would be like to see those two try to work together.

Posted by waxgirl333 | Report as abusive

This situation article’s theme is certainly quite stylish! Pleasing have in common! Could you keep all of us up to date.

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