AOL Circles the Wagons With Its Bankers
AOL management is busily hunkered down with its bankers, working on a strategy to avoid a takeover, according to the New York Post. The problem is that falling stock prices make the company a target for an unfriendly takeover -- shades of the 1980s.
AOL wouldn't comment on the story, though it makes a lot of sense. The company's fortunes on the Street have been, well, less than cheery, particularly around the time it announced a $250 million stock repurchase. Here's a look at the stock since the company spun out of Time Warner and went public independently (click to enlarge):
AOL is facing a tough financial situation. To start with, its gross margins are currently just under 37 percent, compared with 58.5 percent for Yahoo (YHOO), 55.3 percent for The Street (TST), and 48.1 percent for Demand Media (DMD). And it's getting worse: last quarter, AOL's gross margin was 21.6 percent. The cost of the news operations is enormous.
Will it get better? Possibly, but AOL is in a race. Revenue continues to fall and, with losses, so will cash on hand. That puts the company in a weak position. It has to improve revenue and margins immensely to stay in business, and in the meantime, it may not have the resources to fend off an acquisition attempt.
A private equity group or even a single wealthy person with enough backing could buy the company, shut down anything that doesn't look profitable (like Patch), and then sell off the parts. Investors are getting tired of the company not turning around, as CEO Tim Armstrong has now had a couple of years to make his work pay off.
The new covenant
There may be another motivation, as well. Loans, lines of credit, and certain types of insurance often carry financial covenants -- conditions the company must meet to remain a borrower in good standing. Some covenants, for instance, require a borrower to maintain sufficient earnings or cash on hand to cover regular expenses.
Although there's no way to know for certain without seeing the documents, it's not unreasonable to suspect that continued declining performance could put AOL in danger of violating one or more of its covenants. The penalties for violating covenants vary depending on the contract, but they often allow lenders to demand accelerated repayment of the original loan. And AOL has tens of millions of dollars in debt.
Welcoming a takeover could actually be good news for AOL. But the egos involved probably won't let that happen. At least not until things are much, much worse.
Related:
- It's Time for AOL to Embrace Its Inner Takeover Target
- AOL Earnings: Is Patch a Bomb -- or a Secret Weapon?
- AOL Patch-Amex Deal Takes on Groupon -- and Could Hurt It a Lot
- Big Surprise Here: AOL Is Bungling Its HuffPo Integration
Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
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