AOL and Yahoo! in possible merger talks following Bartz’s axing

A recent report from Bloomberg claims that AOL and Yahoo! are in early merger talks just a week after the firing of former Yahoo! CEO Carol Bartz.

The report claims that AOL CEO Tim Armstrong approached former Yahoo! CEO Carol Bartz about a merger of the two companies last but year but was rejected. Carol Bartz’s firing seems, however, to have opened the door for AOL to make a second attempt.

According to Bloomberg, “Yahoo! is unlikely to be interested in a deal for AOL at this time given the company’s losses and declining revenue, according to one person familiar with the matter. AOL’s market value is about US$1.6-billion, while Yahoo’s is about US$18.2-billion. Graham James, a spokesman for AOL, and Kim Rubey, spokeswoman for Yahoo!, declined to comment.”

Citing “people familiar with the matter,” Bloomberg said Armstrong has talked with private equity firms and investment bankers from Allen & Co. working with Yahoo!.

Following the reports of a possible merger AOL shares lost 5.28 percent in New York to close at US$14.72. Yahoo! shares, which had gained five percent on Wednesday and another six percent on Thursday, inched up 0.28 percent on Friday to close at US$14.48.

Bartz, a former chief executive of business software company Autodesk, was hired in January 2009 to engineer a turnaround at Yahoo! after the company had rejected a US$47.5-billion buyout offer from Microsoft Corp. in 2008. The firm was once worth US$80-billion but has since sunk to just over US$17-billion.

In announcing Bartz’s departure, Yahoo chairman Roy Bostock said a “comprehensive strategic review” of the company was underway.

AOL’s interest in Yahoo!, experts say, lie in Tim Armstrong’s efforts to buy some time while issues around TechCrunch and the fallout of Michael Arrington are resolved.

Mathew Ingram of GigaOm questioned whether Armstrong would be next to follow Bartz out the door:

In many ways, Yahoo! and AOL are like different sides of the same coin: Both are gigantic enterprises, and both have legacy businesses that produce plenty of cash but are also a drag on the company that prevent them from being more innovative. For AOL, the dial-up access business continues to generate money — money that Armstrong has used to buy The Huffington Post and to start the Patch.com hyperlocal news venture, among other things — but it is declining rapidly. For Yahoo, it’s the content side of the business and the giant portals that it operates, which continue to get millions of visitors.

Neither AOL nor Yahoo are as powerful as they used to be, though they are still giant enterprises that hold sizable stakes online.