After Yahoo, Are Things About to Turn Ugly for AOL?

AOL: AOL logo

Investors have been much more patient with AOL (NYSE:AOL) compared to Yahoo (NASDAQ:YHOO), even though both the companies have been afflicted with a rather similar problem of not being able to turnaround their core online advertising business. Activist fund Starboard Value, which holds around a 5% stake in AOL, wrote a letter in December urging the company to nominate directors for the board. Now, as AllthingD reports, [1] the deadline for that demand is nearing. Having said that, we do not expect the situation to turn as bad for AOL as it did for Yahoo.

See our complete analysis for AOL’s stock here

AOL Mainly Dealing with Core Business Issues

Yahoo is facing a unique problem in that much of its value is locked up in its Asian assets. To make things worse, the talks to sell its Alibaba and Yahoo Japan stakes have also reportedly broken down, prompting investors to be up in arms with the company’s leadership. However, AOL’s situation is unlikely to turn this ugly, primarily because the company is dealing with more of a strategic issue than a leadership failure.

Although AOL’s declining margins remain a cause for concern, Tim Armstrong has been able to revive online advertising revenues, especially as its subscription businesses continue to decline. In this regard, we expect any possible discussions between AOL management and Starboard Value to be more constructive than it has been with Yahoo and its key investors, although it won’t be a surprise if more heads roll within AOL’s senior management. [2]

We have a revised price estimate of $16 for AOL stock, which is around 12% below the current market price.

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  1. Proxy Ho? Like Yahoo, AOL Could Face Alternate Board Slate From Irked Investor as Early as Today, AllthingsD, 24th Feb 2012 []
  2. AOL’s CTO Alex Gounares Leaves Company, AllthingsD, 27th Feb 2012 []