While CEO Tim Armstrong struggles to make AOL (NYSE:AOL) a preferred choice for advertisers, the company might face a tough time surviving 2012 and may become a target for interested private equity bidders, much like Yahoo (NASDAQ:YHOO) was following Bartz’s ouster. It seems AOL is bracing for this possibility, having already combined its subscription and web access services for a possible spin-off in the future.
Advertising Providing Gains But Margins Eroding
AOL’s significant investments in providing digital content have certainly provided some relief to declining revenues, but it has come at the cost of eroding margins for the company.
This significant decline is coming on account of the high cost of revenues, as the company released new ventures such as Project Devil and the Editions Magazine for the iPad. As a result, investors are still skeptical and worried that Tim Armstrong’s turnaround is actually just burning cash.
Some of its moves could make AOL a “cleaner” company as an acquisition target.
The dial-up access and subscription businesses are steadily on the decline and ready to be spun-off, and in past quarters the company has steadily let go of non-strategic assets such as its social network Bebo.  Additionally, AOL does not have any large locked in investments like Yahoo’s Asian assets, which are proving to be the biggest point of contention in the latter’s bidding process.
Going forward, these could prove to be ideal conditions for private equity firms, who are likely keeping a close an eye on AOL.
We have a revised price estimate of $14 for AOL stock, which is roughly 5% below the current market price.Notes: