AOL CEO pitches investors on Yahoo deal: sources
While Yahoo’s own strategic review has bumped AOL to the back burner for many on Wall Street, Armstrong is still trying to drum up shareholder support for a deal with Yahoo, presenting it as an alternative to going it alone as an Internet media company.”The focus in the meeting has gone from a year ago of being around the fundamentals to now being how could you carve this up, what are separate assets worth, are there ways to sell off the business to extract value from them,” said a top 20 AOL shareholder who attended one of the meetings.Armstrong said a merger between AOL and Yahoo could wring out $1 billion to $1.5 billion in savings from overlapping data centers and duplicate news sites, such as sports, entertainment and finance, according to another major shareholder who met with Armstrong.He is pushing the notion that a combination with Yahoo would appease ad agencies looking for more efficient buys with a bigger audience, said the two shareholders.They said they liked the idea of a merger with Yahoo but it remains to be seen if Armstrong can pull it off.Armstrong’s defection from Google Inc to AOL in 2009 had raised investors’ hopes that he could revive a fallen giant once famous for connecting the world to the Web.Recruited to AOL for his advertising sales prowess, Armstrong wants to turn the company into one of the top media destinations dependent on ad revenue, after a disastrous 10 year merger with Time Warner Inc.But so far, that seems elusive when AOL has to compete for advertising dollars against the likes of Facebook and Google, in addition to Yahoo itself.In August, AOL reported a surprise quarterly loss and blamed weaker-than-expected advertising growth. Shares plunged 31 percent.AOL, Yahoo and Microsoft in mid-September formed an advertising partnership to go up against Google, according to AllThingsDigital blog.A deal with Yahoo could serve as a way for Armstrong to bow out gracefully. The idea is not new — it was floated when Microsoft Corp made a bid for Yahoo in 2008, and resurfaced again last year when AOL hired Bank of America and Allen & Co to review alternatives.”As far as Armstrong’s desire for an exit, he doesn’t want to be doing what he is doing 18 months from now. He wants to be out,” said a source familiar with Armstrong’s thinking. “He’s an ambitious sort of guy and AOL is such an afterthought. But he would definitely put his hat in the ring to run a combined Yahoo/AOL.”Although Armstrong’s performance has disappointed many shareholders, some are not ready yet to pitch him overboard.”He’s in the sixth inning,” said the top 20 AOL shareholder. “It is not fair to grade him right now but I think the investment community is a little put off. There is a strong desire to see tangible results.”AOL declined comment for this story.Yahoo and AOL have many common shareholders as of June 30, including Capital Research, BlackRock, Vanguard and State Street.Fidelity Management and Research Co, AOL’s No. 2 shareholder as of June 30, cut its stake in AOL to 3.7 percent from 10.3 percent according to a regulatory filing Tuesday.WHAT’S BLACK AND WHITE…AOL’s stock has sunk more than 40 percent since it was spun out from Time Warner in 2009, ending what is widely regarded as one of the worst corporate mergers in history.What was supposed to be a new media company is looking increasingly old media, similar to newspapers.Both AOL and newspapers are trying to jump-start digital revenue based on news and information, but both are yoked to legacy assets, the Internet dial-up access business and printing press respectively.”Dead money” is how another media investment banker described the predicament of the rapidly dwindling dollars derived from dial-up access and print newspapers.AOL has invested heavily in news, some $160 million so far this year on building out its online local news network Patch and its $315 million acquisition of the Huffington Post.Subscriber revenue, which represents about 38 percent of AOL’s total revenue in the first six months of 2011, is expected to decline 23 percent this year, estimated Benchmark Co analyst Clayton Moran.Moran forecast that advertising revenue at AOL will grow 1 percent to 2 percent this year.”There is a race to grow the digital business before the subscription business disappears and right now they are losing that race,” Moran said.There are still some believers in AOL, just as there are in the newspaper business. Dallas based investment firm Hodges Capital Management holds shares in the New York Times Co, Gannett Co and A.H. Belo on the notion there will always be a need for content.However, when asked if the firm would consider investing in AOL, Hodges analyst Derek Maupin said it was hard to say. “We look at as many ideas as we can. You never know what you are going to turn over.”
Bullish Apple investors start calling for dividend
After the death of chairman and chief innovator Steve Jobs last week, investors still like what they see at Apple: record demand for the latest iPhone 4S pushed its stock price near an all-time high. And it has a cash hoard of $75 billion.A Thomson Reuters survey of 11 portfolio managers taken after the news of Jobs’ death showed strong support for Apple’s new management team led by Chief Executive Tim Cook, and confidence that Apple has at least a few years of great products in development.But they also want Apple to start giving up some cash.”I would opt for a meaningful dividend,” said Peter Deininger, a portfolio manager at Columbia Large Cap Growth Fund, one of Apple’s largest investors.”Given the magnitude of the cash balance and the ongoing free cash flow generation, the company could make a statement about its ability to sustain those flows,” Deininger added.Six of the 11 money managers polled by Reuters called for a dividend payout as a reward for their loyalty — something they fear will be tested as Cook tries to fill Jobs’ shoes.Ten portfolio managers said they still hold Apple stock on faith that Cook will be able to deliver on Jobs’s vision in the near term. But five managers expect investor faith in Apple to be tested in the longer term.”I worry that Steve was a center of gravity for the company and, over time, people will say ‘I wanted to work for Steve’ and go and do something else,” said David Eiswert of T. Rowe Price. “That will be something to watch over the next year or two.”Apple has long resisted a dividend. It has put its money toward internal product development, made the rare acquisition — and built its cash stockpile, which now accounts for about a fifth of its value. Apple’s market cap soared to just shy of $349 billion when Jobs stepped down in August, from $5 billion when he returned to the company in 1997.That unusual torrid growth in a large company has one money manager in the survey bracing for an eventual slowdown.”We haven’t seen a company this size grow, so it has to decelerate,” said Richard Sheiner of Geneva Advisors.So far investors are sticking with the company.”The creative talent at Apple is broad and deep, and it has established a ‘brand moat’ with the consumer,” said Nigel Holland, who helps manage $565 billion at Legal & General Investment Management.And that’s a big reason why three of the managers surveyed said they have bought up all the Apple shares they are allowed to.”There’s every reason to own Apple stock, and we are committed to owning it over the next couple of years,” said Keith Wirtz, chief investment officer of Fifth Third Asset Management.Bruce Olson, co-portfolio manager of the Wells Fargo Advantage Growth Fund, agreed. “The coast is pretty clear for them for the next five years,” he said.Beyond the short term, however, some shareholders are worried about whether Apple can continue to push out innovative gadgets after the product pipeline Jobs left behind is tapped out.”If we saw a slowdown on product launches and developments, that would give us some pause. Less people camping out for a few days to get the new product — that would be symptomatic of it losing its touch,” Wirtz said.One fund manager polled is not waiting around for Apple to fall from grace.”We don’t have shares in Apple,” said Kim Caughey Forrest, vice president and senior analyst at Fort Pitt Capital Group. “Jobs’ death contributed to the skepticism, but it is also the closed environment of selling hardware and software together that works extremely well for consumers but not so well for business.”
