From the same Merrill Lynch report, some more interesting aspects of a possible Yahoo-AOL deal if it happens: “Our models suggest purchasing AOL would be accretive for Yahoo! in year 2,
even if it were to pay $18bn (20x 2007E EBITDA) for only the advertising portion of its business and assuming only $100mn in cost savings. Purchasing all of AOL would be even more accretive given the low multiple of its access business, but this seems less likely. Our colleagues have noted in previous work that purchasing Yahoo! would be only mildly dilutive for Microsoft. Even at 20x EBITDA, AOL’s advertising business is likely to have an effective P/E below that of Yahoo! (due to lower capital investments and thus depreciation) and the analysis should therefore be no less favorable for this potential combination.
From a structure perspective, an all-stock deal would leave Time Warner with a 32% stake at current prices (and assuming an AOL price of 20x 2007E EBITDA). This would make Time Warner the largest shareholder in the combined company and would be consistent with our view that Time Warner is willing to own a smaller piece of a larger company (as is possible with Time Warner Cable). If Time Warner desired a larger stake in order to ensure sufficient influence and/or exposure to potential upside, it could contribute additional cash.”