AOL a prime target for private equity?
AOL could on the radars of some private equity fund managers. The stock price of the dial-up dinosaur has cratered in the last year, down nearly 50% from its 2010 highs. Analysts expect the rapid deterioration of the company’s value to be the catalyst for a private equity buyout.
The business of “access”
Remember when AOL dominated in the late 1990’s? The company pioneered the business of Internet access with its dial-up technology, sold to millions of wide-eyed Americans. But that revenue model is all but dead, and the last step in the company’s ailing product lifecycle is to clear the carcass off the road.
Companies like Google and Yahoo! swept the Internet advertising market, a business model based on selling text and graphic display ads, from right under AOL’s feet while they slept. Then, all the news and information websites started publishing content for free in hopes they would generate cash not from subscriptions like AOL did, but from impression ad sales.
Then, breakthroughs like Ethernet and cable-access, DSL, T1, Wi-Fi, and fiber optic cables came. The technologies collectively made up the fast-access revolution that together with new Internet business models dealt a defeating blow to AOL.
Today, AOL is down more than 50% from its stock price highs clocked in 2009 when the company was spun off from AOL Time Warner. From 2000 to today, Time Warner Inc. is down over 83%, from a high of about USD $170 a share to about $27 a share.
Buying AOL now would be like buying an old, decrepit championship race horse in hopes that it could win once more. Or, maybe there’s another way.
U.S. AOL subscriptions since 2001
Potential private equity interest
Where private equity managers may see value in AOL is that the company is trading far below its reported book value (assets less liabilities). Their goal wouldn’t be to reemerge AOL as a new, lean, Internet powerhouse ready to take on the world; their goal would be to squeeze enough cash out of the company as it dies to cover the purchase price, and (hopefully) then some.
Let’s crunch some numbers.
Relative to the company’s discounted 3-5 year expected cash flow, a private equity buyer could probably expect to pay around USD $1.5 billion for AOL. That’s also in line with the average sale price for an Internet company valued at over $500 million in the last 12 months, according to an analyst in San Francisco, California.
Last year, the company reported a loss of nearly USD $783 million on about $2.4 billion in revenue. If the firm can come in and slash expenses, it’s feasible that they could get their principle back within a year or two and make a profit on the last year or two.
Around 2013-2015, the firm could chop up the company’s assets and sell them off for a handsome profit, and AOL would exist only on Wikipedia and as a big red mark on the previous investor’s portfolios. Right now, AOL has about $2.9 billion in assets, and only about $7 million in liabilities.
Image Credits: Wikipedia.org.
Tags: AOL, book-to-value, price, private equity, takeover
