07 February 2011

Mergers and Acquisitions

I see that AOL has just bought the Huffington Post.

First, I didn't even know AOL still existed. But when I saw the terms of the deal ($300 million in cash, $15 million in stock) I got a little curious.

I wanted to see how investors were greeting the information and...not well. AOL closed on Friday at $21.94/share and opened today (after the announcement) at $21.64 (1.3% drop) and it looks like it is going to close with about a 3% drop for the day. Not terrible, mind you, but also not exactly an endorsement, either.

AOL has lost 23% of its subscribers from 2009 to 2010 and really doesn't have the cash on hand to be sending $300 million out in an acquisition, especially in acquiring an entity that doesn't really earn anything (AOL had $800 million cash and equivalent at the end of 2010 (unaudited), but ad revenues were down 29% from 2009 to 2010 and their net loss for 2010 was $782.5 million (again, unaudited, see here)).

I'll grant that a lot of the red ink may be a result of the cleansing of the books from the Time/Warner debacle, but facts are facts. Your company is hemorrhaging money and customers, neither your company or the company your acquiring actually produces anything of substance and you're one-half of one of the worst mergers in the history of finance, does this seem like a good idea?

Listen, I like reading idiot celebrities writing about dead dyspeptically tendentious historians just as much as the next guy and, of course, Sean Penn, but is there any money in it?

This has nothing to do with politics, mind you. I may think most of the content at the Huffington Post is rubbish, but a sound investment is a sound investment. I'm reminded of Rupert Murdoch saying that if he were to buy the New York Times, he wouldn't change the political leanings of the editorial board at all, unless it meant that he would make more money. But zero substance, from either player, no cash in one hand and rapidly evaporating cash in the other seems, to me anyway, to add up to a bad idea.

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