Did Yahoo! Just Pave Its Way To Finally Buying AOL?

As I’ve reported over the last week, Yahoo! has made a couple of apparently high-cost moves, that many people that don’t watch the company closely have been surprised about. The first, was Yahoo! getting approval for a new 46-acre headquarters in Silicon Valley. The second happened yesterday when Yahoo! acquired Associated Content. I thought about this a great deal last night, and my leading conclusion was that Yahoo! is putting all the pieces together to buy AOL.

So the first thing I did was check around the Internet to see if anyone recently had revived this idea since it was hot back in 2008. Lo and behold, two months ago (before either of these moves) Kara Swisher had just the same thought. So I’m not the only one.

Let’s take a look at these two moves. First, the new HQ. It’s huge, probably more than large enough to absorb many AOL employees (of course, there would inevitably be some jobs lost from this sale at first while Yahoo! cuts duplicates). Yes, most of AOL’s employees aren’t in the Valley – they’re in NYC, Washington and LA, but still, Yahoo! would need more room if they absorbed such a large company as AOL, and these headquarters would help. Also, the new HQ’s facilities will be an added incentive for attracting new employees that might be already interested in working at a Yahoo!/AOL.

The new HQ, however, isn’t nearly as telling as yesterday’s acquisition of Associated Content. First and foremost, Associate Content was co-founded by AOL president Tim Armstrong. The low-cost content producer was long expected to be purchased by AOL, which decided against it to build their SEED system (which from internal reports from AOL, no one likes). So now Yahoo! has grabbed this property away from not only AOL, but has made a preemptive move against soon-to-be-public Demand Media.

So with this one move, Yahoo! has weakened AOL’s position while making it’s CEO a rich(er) man. Of course, AOL is no long a part of Time Warner, so their market cap is US$2.44 billion, whereas Yahoo!’s as of today is US$21.75 billion so the chance of a merger is probably low – acquisition seems the much more likely than merger. Yahoo!’s profits were up in Q1 2010, but their revenue was flat, so the market cap has been pretty consistent for awhile now.

So what if Yahoo! makes a move? My guess is that AOL (and its shareholders) will happily bite. Yahoo! shareholders on the other hand, might not get why management would want to add more Web 1.0-ness to the brand, but the answer is clear: local.

Both companies are making the play to provide extensive content at the local level that they can serve adds display around (in a heightening battle with Facebook). A combined entity would give them arguably the best display ads salesforce on the Internet (Facebook will take years to catch up in that regard). Ad revenue across the Internet continues to climb, and the combined reach of a Yahoo! / AOL will be attractive to many large advertisers, especially as we continue to crawl out of the recession.

There are of course many other factors that will come into play for an acquisition of this size to happen, but in the end, it’s all about the bottom line, so if they combined strength of these two companies to advertisers is attractive enough, all of the other concerns will be details.

Oh, and as Kara Swisher points out, installing Tim Armstrong as CEO and Carol Bartz as Chairman would also make a lot of sense, and would be an exciting prospect for people that want to see Yahoo! succeed.

Lastly, I could be completely wrong, and Yahoo! could be in fact getting ready to sell itself to, “Any company at the right price.” Regardless, they seem to be making moves to do something big.