Finding someone who likes the idea of Yahoo! (YHOO) buying AOL is harder that finding snow in the Sahara. Yahoo!’s stock is off another 3.5% to $13.18 as the media speculates about whether the marriage will be announced tomorrow.

The two most unappealing pieces of any transaction are that AOL and YHOO rely on display advertising, which is having a tough time due to the economy, and no one can imagine how management could combine two so very complicated companies.

What is AOL worth? In the last quarter, it had revenue of $1.057 billion, down 10%. Operating income was off 36% to $230 million. Nearly half of the revenue came from the AOL ISP business, which Yahoo! may not want. The advertising-supported portion of AOL may have very little profit at all.

If AOL’s annual operating income run rate is $1 billion, the company may be worth $5 billion to $6 billion. Take out the ISP business, and the value is likely to be closer to $3 billion.

Yahoo! had operating income of just below $700 million last year on revenue of $7 billion, so it is twice as big as all of AOL and four times as big as the advertising-supported content business. Yahoo! has a market cap of $18 billion. By most estimates, its stakes in China e-commerce company Alibaba and Yahoo! Japan would go for about $5 billion, leaving the firm’s enterprise value at $13 billion or less.

To make matters more complicated, Google (GOOG) owns 5% of AOL, and Yahoo! is trying to close a search advertising partnership with Google. But, why should anyone be troubled by details like those?

If Yahoo! can buy AOL for $3 billion, the purchase may make sense. There would still be considerable risk in putting them together. If Yahoo! buys all of AOL, including the ISP business and pays any more than $5 billion, some one will have blundered.

If Yahoo! closes a transaction above a reasonable price, watch the stock move to under $10.

Douglas A. McIntyre

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