* Private equity interest in AOL has slowed - sources
* PE firms now focused on Yahoo since woes
* Yahoo seen as more attractive, less troubled
By Jennifer Saba
NEW YORK, Sept 16 The troubles at Yahoo Inc
YHOO.O are proving to be a headache for AOL AOL.N, that
other deeply challenged Internet company trying to turn around
Interest in AOL from private equity firms ramped up after
the company's stock plummeted about 30 percent on dismal
earnings results last month. Allen & Co and Bank of America
Securities are advising AOL on strategic alternatives,
including a possible sale, sources said.
Problem is, the private equity firms have now turned their
attention to Yahoo, which is reportedly seeking its own sale
after firing Chief Executive Carol Bartz on September 6 and
attracting the ire of activist investor Daniel Loeb.
AOL declined to comment for this story.
Sources said the top-tier private equity firms that were
looking at AOL are now setting their sights on the company
famous for its purple logo and peppy exclamation point, viewing
it as more valuable and housing more attractive assets than
"Yahoo has jumped to the forefront," said one industry
source familiar with the situation.
Indeed, according to this industry source and one other
source, several PE firms have lines out to at least two media
companies to see if they are willing to partner on a bid for
all or pieces of Yahoo. Both sources declined to name the PE
firms or media companies.
AOL and Yahoo are two vastly different business in terms of
market value -- roughly $1.6 billion and $19 billion
respectively -- meaning that there are different pools of
potential buyers for each asset. The big private equity firms
with massive amounts of money under management are able to go
after Yahoo on their own or with a strategic partner. The
smaller private equity firms are better equipped to digest AOL
and likely couldn't pursue Yahoo absent being part of a
consortia of buyers.
Or, to put it another way, AOL's second-class assets are
now only attracting the interest of second-tier buyers.
Indeed, only when compared to AOL does Yahoo come out the
"They are both in rough shape, but AOL has more structural
challenges than Yahoo," said Ross Sandler an analyst with RBC
Compounding AOL's problems is the fact that its lucrative
subscriber dial-up business is also one of greatest
liabilities. Sandler said dial-up is partly responsible for a
25 percent year-on-year decline in AOL's free cash flow.
"At Yahoo you don't have those issues," he said.
To make up for the loss of subscription revenue, AOL is
training its sights on advertising sales. But even that is
having set backs. Its launch last September of a more expensive
large ad-format with interactive panels that dominate a Web
called Project Devil is still trying to gain traction on
Madison Avenue. [ID:nN1E7871OU]
Under Armstrong, AOL has also developed a penchant for
investing in projects that have yet to pay out.
Case in point: Patch.com. AOL has shoveled roughly $160
million into the network of more than 800 neighborhood-oriented
websites dedicated to local news, many of which are less than a
year old. Yet Patch is on track to lose $140 million to $150
million this year, estimates Sandler.
Though expensive, at least AOL's attention-grabbing
acquisition of the Huffington Post for $315 million is
delivering returns since the business is profitable.
Yahoo's coming on the block couldn't have come at a worse
time for Armstrong. The former Google Inc (GOOG.O) ad sales
executive has seen his reputation dented since taking over AOL.
According to one of the industry sources, Armstrong' reputation
has taken as much of a hit as Bartz's, even before he bungled
the dust-up that resulted in TechCrunch founder Michael
(Reporting by Jennifer Saba; Editing by Peter Lauria and