Weakness in the stock market always brings about declining equity trading prices. Lower stock prices lead to lower market caps and lower valuations. With over $1 trillion dollars on balance sheets, cash rich companies like to go M&A shopping. The tech sector and pharmaceutical sectors have been hotbeds for M&A activity in recent years. Let’s take a look at a technology stock that is ripe for acquisition.
I am not a fan of AOL’s (AOL) business model at all and have told investors to stay away from the stock for years. My opinion changed about a month ago as the stock has simply gotten too cheap. AOL is trading in the $11 range which is a price that an investor can speculate on this stock at.
AOL is trading at nearly half of its book value. The company’s market cap is just $1.2 billion and the enterprise value is just $998 million dollars. That is because of the $450 million dollars in cash on the balance sheet and just $120 million debt. AOL’s valuation is so cheap that any public or private enterprise firm could take them over and not have to finance the deal at all.
Forget about the search component and the remaining dial-up business. The online company is attractive to firms because of its content. AOL owns a bunch of attractive media properties including the HuffingtonPost. TechCrunch, Engadget, WalletPop, and DailyFinance. The media company also owns FanHouse, ParentDish, Asylum, Spinner, BlackVoices, AOL Latino, PoliticsDaily, MapQuest, and Patch.
These properties generate traffic which could be monetized more effectively. This is a company that still generates over 100 million unique pageviews. AOL is hoping that the company can increase the cash flows generated by display advertising. The $315 million dollar purchase of the Huffington Post shows just how serious the company is about transitioning to an advertising company.
I think that the purchase of AOL makes perfect sense for Google.
Google + AOL
Google would eliminate a minor player in the search engine market. Google paid $1 billion dollars for a 5% investment in the firm back in 2005. Google could buy the whole firm for a $1 to $2 billion dollar total investment.
- Google and AOL already have a revenue sharing deal for mobile search and online video. Buying AOL would fit perfectly into the company’s latest plans to expand its share in the mobile market. Instead of sharing in part of AOL’s revenue stream, Google could own it all.
- Google is the king of advertising and AOL’s 12.5% growth in display ads would tie right into the company’s core business model.
- The purchase of AOL would not have the regulatory scrutiny that a Yahoo deal would have.
- The CEO of AOL was formerly the President of Google America. It is likely that the culture at AOL is similar to the one that he learned while at Google which would make a merger seamless.
- The move would be a preemptive strike to thwart Microsoft which could buy AOL to expand its online presence and slightly increase its share of the search market.
- Google could dump the Internet access business by 2015 and have the company solely focused on monetizing its core content properties.
In my opinion, someone needs to buy AOL because the company is not going to realize its growth as a standalone company.