E-Commerce News: Wall Street: Citigroup Sees Riches in Potential Yahoo, AOL Merger

A Yahoo/AOL merger would bring long-term benefits to both firms' stock, according to a note Citigroup issued to clients. With such a merger, Yahoo would maintain its search options, while Time Warner's AOL would enjoy greater Internet scale, Citigroup analysts said.

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A merger between Yahoo (Nasdaq: YHOO) and Time Warner's AOL segment could generate annual synergies of about US$900 million, according to Citigroup, which said in a recent note to clients that a few hints suggest a deal could be possible.

Aside from annual savings, the broker said Yahoo would gain display scale and keep search options open while Time Warner would gain Internet scale via a passive equity stake in a larger entity.

'Long-Term Positive for Both Stocks'

"If the two companies proceed with a merger, we expect Time Warner to exchange its advertising

business for an equity stake in Yahoo," analyst Jason Bazinet said. "And, we suspect both companies would be in a stronger competitive position to extend their lead in display and invest in search."

The broker estimated between 33 cents and $3.45 per share of earnings upside to Time Warner shares if Yahoo and AOL merge. Citigroup said the low-end estimate assumes AOL is sold for $8 billion, while the high-end assumes a sale price of $12 billion.

For Yahoo, Citigroup estimates a deal could be worth between 74 cents and $3.06 per share of earnings, but said the transaction would likely remove any remaining Microsoft-inspired premium.

"The bottom line is that we think Yahoo and AOL could merge," Bazinet said. "And we think it could be a long-term positive for both stocks."

Keep Buying

Citigroup maintained a buy rating on Time Warner shares and a hold rating on Yahoo. The broker has a $24 price target on shares of Yahoo and a $25 price target on Time Warner stock.

Shares of Yahoo, a Sunnyvale, Calif.-based Internet services provider, slipped 1.6 percent to $20.97 on volume of 3.1 million shares in morning trading Monday.

Time Warner, a media and entertainment company headquartered in New York City, gained 0.8 percent to $14.53.