AOL: A Google millstone, or bargaining chip?

When Time Warner announced that Google had exercised its rights to rid itself of its 5% stake in AOL, the news wasn't all that surprising. AOL's worth is nowhere near the lofty heights it reached in 2005, when Google purchased the stake for a cool $1 billion. And while the push to get Time Warner to either sell AOL or buy back Google's stake could just be a prudent cash-flow measure in tough economic times, Google could also be pursuing some more strategic options.

First the cash-flow scenario. It's obvious from last month's earnings call, when Google announced a $726 million writedown due to its lackluster AOL investment, that the stake has been more than a drag on Google's balance sheet. Perhaps by forcing Time Warner's hand, it's simply hoping to preserve the nearly $274 million it has left in the venture. If the economy continues to tank--and most say it will, at least for another year or so--getting out now is probably a wise move. Better to get $274 million now than far less a few months down the road.

But there's another scenario. Google's AOL stake brought with it a search deal, in which Google provides both paid and unpaid search on AOL. And recently, there have been rumblings that Yahoo may be trying to buy up AOL. It's difficult to see how the AOL/Yahoo combo might create a winner, but stranger things have happened. And now that Yahoo has a strong leader at the helm in Carol Bartz, the combination might create some actual profitable synergies.

Some say that Google's move is simply a way to force Time Warner into renewing the AOL-Google search deal, and that makes sense. But what if it's really a bargaining chip--a way to force Time Warner to sell AOL off to Yahoo and thwart Microsoft's Yahoo purchase plans? If Yahoo/AOL can make a go of it, they just may not need Microsoft anymore. So Google gets its cash and no Microsoft/Yahoo deal.

Of course, a Yahoo/AOL merger could also be bad for Google. Once Yahoo buys AOL, it may become more attractive to Microsoft, who could buy up the combined company and makes huge gains in search. But Yahoo's Bartz seemed lukewarm on inking a quick deal with Microsoft. She may see AOL as giving it just the leverage it needs to make gains on Google, while keeping Microsoft at bay.

According to the agreement Google signed when it purchased the stake, Time Warner has three options now: proceeding with the spin-off request, buying back the stake at the current appraised value, or... delaying the decision. And Time Warner's chosen the last one. Stay tuned. This could get interesting.

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