AOL Might Be Coming to Its Senses

AOL (NYSE: AOL ) actually might be following my advice and going private. At
least that's the gist of a piece in The New York Post that says AOL "has
huddled with bankers in recent days to discuss options, including the
possibility of taking the company private. CEO Tim Armstrong would be an idiot
not to be considering such a move and doing so hardly would be a shock
considering it recently retained mergers and acquisition law firm Wachtell,
Lipton, Rosen & Katz and investment bankers Allen & Company. Shares of the New
York-based media company have tumbled more than 30% percent this year as
Armstrong failed to wow Wall Street with his $315 million acquisition of
Huffington Post or his hyper-local Patch sites, whose annual price tag tops $160
million. The stock is trading at a rock-bottom multiple of 10, below the average
P/E of 16 of the S&P 500. As it stands now, AOL is a disparate grouping of
services that make no sense in their current configuration. For instance, what
possible connection does Huffington Post have to MapQuest? Maybe one can argue
that a reader of the website would cut and paste links to stories to their
friends over an AIM instant message, but that probably happens less than it used
to because of the surging popularity of Twitter and Facebook. The AOL "Extreme
Makeover" will be much easier to do away from the prying eyes of shareholders.
It will be messy and take time. Indeed, Armstrong has admitted as much, telling
The New York Times that it might take until 2013 to fix AOL. That's mostly
because the fading dial-up Internet access business remains crucial to AOL's
bottom line, accounting for 37% of second-quarter revenue. Its latest 10Q says ,
We believe that our subscription access service will continue to provide us with
an important source of revenue and cash flow for the foreseeable future." AOL
has been a disappointment to investors ever since its disastrous merger with
Time Warner (NYSE: TWX ) more than a decade ago. The heartache for shareholders
continued as AOL shed about $1 billion in market capitalization since it was
jettisoned from Time Warner in December 2009. A recently announced $250 million
stock buyback has done little to address lingering questions about whether AOL
will ever turn around. According to the Post, "KKR has been floated as a
prospective partner for AOL." That would make as much sense as any other
private equity player. One problem with taking AOL private is that free cash
flow a key metric for private equity investors fell 43% to $77.2 million in
the latest quarter. Yahoo (NASDAQ: YHOO ) is another possibility, but it's
difficult to see how combining two weak companies would create one strong one.
AOL might consider acquiring smaller niche media companies, but it seems
doubtful that would add enough readers to please Wall Street. As Felix Salmon of
Reuters points out, developing original Web content is not cheap , and
profitable websites tend to be "run on the cheap." An exception to this
premise is Bloomberg L.P., the media empire founded by New York City Mayor Mike
Bloomberg. The media and data company has thrived for years outside the scrutiny
of shareholders. That is a business model AOL can hope to emulate. Jonathan Berr
is a former AOL freelancer who worked for Bloomberg News for seven years. He
owns no shares of the companies listed.