Yahoo! Should Buy AOL

 | Nov 26, 2013 | 11:43 AM EST  | Comments
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Yahoo! (YHOO) continues to ride high. The stock is still above $36 per share, at a 52-week high after an enormous run from $11 in 2011. Some critics like to complain that this increase is solely due to the rise in the perceived value of its Alibaba stake and that CEO Marissa Mayer deserves no credit.

That's a warped view. Alibaba is a monster and has buoyed Yahoo!'s stock price. But there's also been the increase in value of Yahoo! Japan, the stock buybacks Yahoo!'s board authorized, and an improved "core business" morale, along with improved relations between Alibaba and Yahoo! management.

The critics like to say that the "core business" is a basket case. On the plus side, I can't imagine Mayer or anyone else having a better impact on that business in the past 18 months. That business had been neglected for seven years or more. She came in and really made employees proud to work for Yahoo! again. Plus she started to churn out great products for the first time in years.

But I would have to be an ostrich not to acknowledge that Yahoo!'s core business remains anemic. Revenue growth has continued to elude this company ever since the financial crisis of 2008. You can say a lot of this was out of Mayer's control -- ex-CEO Carol Bartz outsourcing search to Bing in 2006, the rise of programmatic buying taking down display ads, but it's still her responsibility.

Mayer brought in COO Henrique De Castro to steady the ad ship. He has been slow to show results. She brought in Ned Brody from AOL (AOL) to head North America Sales. It's still early.

Meanwhile, critics and investors are getting impatient.

Mayer and her team want to show progress for the part of Yahoo! they're responsible for. As a Yahoo! investor, I am indifferent whether Yahoo! can turn around its core. It would be great for me if it does as it would increase the value of the shares, but I know (or strongly believe) my investment will continue to rise thanks to the Alibaba investment. I believe Yahoo!'s core business is only responsible for about 15% of the stock's value. The rest comes from cash and investments in Yahoo! Japan and Alibaba.

But I believe that Mayer is ready to do another deal to help show the world that the core business is growing again, and I believe the most likely target is AOL, not Snapchat, Pinterest or any of those private companies. Why? Because there's real revenue growth there and interesting ad tech, video, and programmatic buying technology that Yahoo! can use.

With any of the private companies that have been mentioned as possible targets, there will be little revenue for the next year or two. That doesn't help Mayer now.

I've been long AOL over the last two months because I believe that Yahoo! will look to buy AOL sooner rather than later, possibly through some cash-rich split transaction involving Yahoo!'s Japan stake.

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