Jessica Reif Cohen of Merrill Lynch speculates that both AOL and Yahoo may be deal targets, in 2007. The Merrill analyst, backed up by Rafat Ali at tech news site Paid Content, note that Google's 5% stake presents no insuperable obstacle to an AOL deal with Yahoo. The deal makes sense, in so far as AOL and Yahoo are both being eclipsed by Google, and a combination would obscure their relative decline. But there is an unusual hitch: neither AOL and Yahoo has management that could credibly run a merged internet giant.

Typically, merger negotiations, even those that make sense for shareholders, break down because top executives from each company think they're qualified, and entitled, to run the show. But, in this case, the usual problem is reversed: no credible internal candidate to lead a combined effort against Google.

Yahoo CEO Terry Semel is compromised, because Yahoo's recovery spluttered in 2006, and he's 64 years old. Sue Decker, his likely successor, wins plaudits for intelligence and organizational skills, but she's a former analyst and finance specialist, who lacks a vision for Yahoo, let alone a combined company. And even Semel has more feel for the internet, by now, than AOL's new CEO, Randy Falco, a TV executive who is only now coming to terms with email.

There is a way to make a success of a merger of AOL and Yahoo.

Close down AOL's head office in Dulles
Run both AOL.com and Yahoo.com sites off the same platform, Yahoo's
Use AOL's sales team, much of it acquired with Advertising.com, to fill the gaps in Yahoo's
Merge AIM with Yahoo's instant messenger program
Still prune Yahoo's product line and close down its Hollywood operation
Abandon Panama, Yahoo's own planned ad network, concede the sale of text ads to Google, and negotiate the best deal possible

However, none of the three internal candidates has the force of personality, the background, or the vision, to do what's necessary. So, my prediction: AOL and Yahoo may indeed be in play; but they will find different buyers.

8:14 AM on Thu Dec 28 2006
By Nick Denton
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4 comments

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Dave Malhotra at 02:51 PM on 12/28/06
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We've seen Time Warner play this game before. Last year they played Microsoft off of Google to bid up the contract for their search engine business. Google even plunked down a billion dollars for an "engagement ring" (5% ownership stake). Now it looks like they are going to do the same thing again. This time using Yahoo as the rival suitor to get Google to the altar.
Iknowyouknow at 05:59 AM on 12/29/06
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The real suitor is always Microsoft. They screwed up their chance last year and Google thwarted them with a puny $1 billion. They have the cash and given MSN's fortunes, they have the motivation. Will they be smart enough to pay what they need to this time? Good question.
Dave Malhotra at 07:44 AM on 12/30/06
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I think Google and Yahoo are the more likely suitors. Culturally they are a better fit. Also integration-wise Google, Yahoo and AOL are Unix based. Google runs their hacked version of Linux, Yahoo runs FreeBSD and AOL runs mostly Linux. Microsoft runs Microsoft.

Also if you look at Microsoft's history, they don't like to acquire their competitors. There modus operandi is to leverage their monopoly OS to DESTROY them.
Dave Malhotra at 08:39 AM on 12/30/06
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I disagree with the premise of this post. That the lack of a visionary to run a combined AOL-Yahoo entity will prevent a merger from happening or that neither Semel, Decker or Falco think "they're qualified, and entitled, to run the show." I'm sure they *think* they are qualified (even though I agree they probably aren't). I don't think executive insecurities will be a showstopper. Lets take Falco for example. Even with his lack of email experience he wasn't too shy to take the reins of AOL. Why not AOL-Yahoo?

I think precisely because their is a lack of vision that makes a merger all the more likely. If there is no vision then you concentrate on deal-making, executive shufflings, reorgs and copying other people's business models to give the appearance of activity and growth. However, if there is a vision then you concentrate on building that vision into a reality.

At the top of AOL and Yahoo you've got too Old Media dealmakers (Falco and Semel) and a former financial analyst (Decker). These are people who are not technologists. Their technical "vision" is to be fast followers of industry trends and to use their scale and financial wherewithal to poach innovation. You will never see a "Google Earth" originate from their brains. I think they are predisposed to favor some sort of "big deal" transaction because that is their comfort zone--making deals and bean-counting. You will never see them have the guts to make a really huge acquisition like the YouTube one. They wouldn't know what to do with it because they have no vision. A merger is an easier "blockbuster" deal for them to do because both companies do pretty much the same things and basically they would need to integrate the two. Not an easy task, but no vision required.