Tag: AOL

Rise in social networking deals

After a trickle of deals in 2007, this year has seen a flood of acquisitions of social networking sites as buyers look to sell advertising and services around these properties. Acquirers have spent some $1.15bn already on networking sites, compared to just $95m in all of 2007. This year’s M&A was boosted by several key service providers making significant bets on the market, including AOL’s $850m purchase of Bebo and Comcast’s acquisition of Plaxo for an estimated $150m. (Both deals, we should note, are larger than last year’s collective tally for social networking sites.)

And it’s not just the obvious acquirers picking up these online sites. Mobile phone maker Nokia shelled out an estimated $30m for geo-social networker Plazes, while Hoover’s, primarily known as a business directory, bought into the Web 2.0 trend with its tiny $4.2m acquisition of Visible Path. Even Barry Diller went shopping in this market, with his IAC/InterActiveCorp’s purchase of Girlsense.com.

Despite the broad interest and appetite for social networking sites, we wonder if supply hasn’t outstripped demand. At last count, there were more than 130 networks of various stripes. With only two companies (Facebook and LinkedIn) likely to go public anytime soon, that leaves a slew of sites hoping to connect with buyers. Coming off a 1,200% increase in M&A from last year, we can only surmise that the number of deals – and, more important, the valuations handed out to the sites – is likely to come down.

Acquisitions of social networking sites

Period Deal volume Deal value
Jan.-Aug. 2008 20 $1.15bn
Jan.-Dec. 2007 9 $95.1m
Jan.-Dec. 2006 2 $5.1m
Jan.-Dec. 2005 1 $580m
Jan.-Dec. 2004 4 $129.8m

Source: The 451 M&A KnowledgeBase

Ailing AOL no closer to a sale

Although CEO Jeff Bewkes and his Time Warner (TWC) cohorts put a positive spin on the company’s second-quarter results Wednesday, we’d sum up the call as bafflingly uneventful. The company highlighted gains in its TV and movie operations, while remaining virtually silent on its plans for AOL’s legacy Internet access business. If anything, the news concerning the ailing AOL division worsened, with Time Warner indicating that the AOL split is not set to occur before early 2009. The lack of urgency on the part of Bewkes amid declining AOL subscriber count and revenue is extremely disheartening.

Subscriber count at the legacy AOL division fell to 8.1 million subscribers from 10.9 million a year ago. This continues the trend of a year-over-year decline of an average 20-25% since 2003. For the first time in AOL’s history, revenue from advertising tops revenue from its subscription business ($530m and $491m, respectively). Operating income for the AOL division is $230m, one-third of which we estimate comes from subscriptions. This is in contrast to Earthlink (ELNK), which has seen its operating income steadily increase quarter-over-quarter for the past year. EarthLink’s operating income from its most recent quarter was $64m, despite having only 3.3 million subscribers. Clearly, AOL is failing to properly make money from its subscribers. We suggest the company turn the business over to someone who can do that as soon as possible.

Fortunately, there appears to be a suitor for the AOL legacy business. EarthLink CEO Rolla Huff has said he’s ready to discuss a deal. Time Warner should take him up on that immediately. If AOL’s subscriber base continues to decline (and there is no reason to believe it won’t), by the time Bewkes is ready to negotiate a sale, it will be in the six million range. Our advice to Bewkes: Put together a deal book on AOL and get out of the subscription business while you can.

AOL ISP divestitures

Announced Target Acquirer Deal value Price per subscriber
Oct. 2007 Albanian ISP business Telekom Slovenije $5.6m $2,489
Oct. 2006 UK ISP business Carphone Warehouse $712m $339
Sep. 2006 French ISP business Neuf $365m $730
Sep. 2006 German ISP business Telecom Italia $878m $366
Dec. 2005 Argentinean ISP business Datco $1m $67
Feb. 2004 Australian ISP business Primus $18m $200

Source: The 451 M&A KnowledgeBase

Will Earthlink acquire AOL’s ISP business?

In April we speculated that AOL (TWC) might be close to shedding its legacy ISP access business. We pegged the most likely acquirer as Earthlink (ELNK). In an earnings conference call this week, Earthlink CEO Rolla Huff echoed that sentiment, stating that he was bullish about combining its business with the AOL division.

Of course, interest from one party does not a deal make. But, given AOL’s burning desire to shed this dinosaur and completely rid itself of its ancient and tumultuous past, it is safe to assume that if the two parties can agree on terms, a deal might just materialize. The real question is how struggling Earthlink can come up with the estimated $1.5bn-$2.5bn it would take to acquire the AOL unit and its roughly nine million subscribers. Since Earthlink is one of few companies able and willing to make that acquisition, AOL does not exactly hold a lot of bargaining power. We think Earthlink might just get this at a bargain basement valuation closer to $1.5bn, just two times AOL’s cash flow from its ISP division.

Crisis averted

Brenon Daly

After three months of nonsense, Ballmer’s folly is over. Microsoft’s CEO said over the weekend he will not pursue Yahoo, a move that shareholders applauded right from the opening bell on Monday. (Microsoft stock never traded below Friday’s close, while shares of Yahoo, which had been abandoned to trade on the company’s fundamentals, were slashed 15% in early Monday afternoon trading.) In our view, the ‘relief rally’ in Microsoft stock solidifies our view that the company was wrong-headed — both in decision and execution — to go after Yahoo.

We need only look back in Microsoft’s own M&A history to see how unlikely it was to get the kind of returns it was hoping from Yahoo. In early part of this decade, Microsoft inked a pair of deals for business software companies that was supposed to narrow the gap to the long-dominant vendors. In quick order, Microsoft shelled out a combined $2.4bn for Great Plains Software and Navision Software and set about knocking off SAP and Oracle. Executives talked about Microsoft’s division, which sold ERP and CRM software, growing into a $10bn business. That hasn’t happened – not even close. More than a half-decade later, it barely scratches out $1bn in annual sales and increasingly appears technologically and competitively irrelevant. The acquisitions did nothing to make up ground on SAP or Oracle, much less the new breed of rivals including Salesforce.com and SugarCRM. (We recently made the case that Microsoft should divest this unit, called Dynamics.)
Adding Yahoo to Microsoft’s online division would have simply repeated the mistakes of Dynamics. The protracted and messy acquisition of Yahoo would not have gotten Microsoft any closer to knocking off Google from its top spot in online search advertising. To their credit, the folks in Redmond, Wash. saw the past as prelude. And if the cautionary tale served up by Dynamics was a little too close to home, Ballmer could always pick up the phone and call Jerry Levin to ask how Time Warner’s ‘transformative’ $185bn purchase of AOL worked out. Of course, Ballmer tabling the Yahoo bid does leave one question unanswered: Which transaction destroys more shareholder value? Trying to graft a sprawling Internet property onto a media company or trying to graft a sprawling Internet property onto a software company? Even though Ballmer left the door open for a future bid for Yahoo, his shareholders have already indicated they don’t want to pay to find out the answer to that question.    

Short and sour

Date Event Yahoo stock price
Feb. 1, 2008 Microsoft unveils $31 per share unsolicited offer for Yahoo $28.38 (up 48%)
May 5, 2008 Microsoft pulls offer $24.24 in afternoon trading (down 16%)