AOL looks to jump into bed with Yahoo

AOL is actively exploring a breakup of the company in a complicated series of transactions that may lead to a merger with Yahoo, according to sources close to the plans.

AOL looks to jump into bed with Yahoo

AOL has not yet made a formal proposal to Yahoo, the sources said, but the latest discussions derive from plans contemplated in 2008 and 2009 before Time Warner spun off AOL.

At the time, the media conglomerate had explored the option of splitting AOL’s two main businesses – a legacy dial-up Internet service that would have been spun off or sold to EarthLink or United Online, while the display advertising business would have been merged into Yahoo, the sources said.

AOL has continued to explore a breakup since the break-up from Time Warner and is still seeking a deal. “You can drive the pieces into people’s hands that could pay top dollar for them and create value, or spin them off,” said one of the sources.

This strategy depends on the buyers for the parts. Yahoo and EarthLink, for example, have changed direction since Time Warner first considered these plans, the sources said.

EarthLink was once a willing and capable buyer of AOL’s cash-generating dial-up business, but it has since tied up most of its free cash in a deal to buy DeltaCom for $516 million.

Combining Yahoo and AOL’s web portfolios made strategic sense, said Hudson Square Research analyst Todd Rethemeier, because Yahoo’s home page attracts audiences to its sports, finance, general news and email, while AOL has strengths in maps and entertainment news.

Yahoo’s traffic could also support AOL’s display ad business, which could give AOL the confidence to shed the dial-up division.

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