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AOL and Arianna, Match Made in Heaven?


AOL shares ended down 3.42% in an otherwise ebullient market on Monday. Skeptics are plentiful but there is no doubt the company needed to do something drastic to regain some of its old mojo.

Never a dull moment in digital media. First The Daily Beast buys Newsweek from a 92-year-old tycoon for all of a dollar, then AOL, Inc. (AOL) announces it is acquiring The Huffington Post news portal in a $315 million deal apparently sealed in a Super Bowl sky box.

AOL, which lost $782 million in 2010, is clearly making an all-out wager on content and current events as its erstwhile dial-up business heads inexorably toward oblivion. Its shares ended down 3.42% in an otherwise ebullient market on Monday and skeptics are plentiful but there is no doubt the company needed to do something drastic to regain some of its old mojo.

Last week brought more confirmation that its principal business remains in dire shape, with core legacy subscriptions tumbling 23% on an annual basis, a level of decline we have essentially seen every year now since the end of 2006. Advertising sales slumped 27% and operating margins fell to 19%, which actually represented an improvement on account of tighter cost control.

Under CEO Tim Armstrong, the firm's fifth leader in little over a decade, AOL has lately sought to branch out by buying well-regarded blogs such as TechCrunch in a frenzied autumn of acquisition activity. While its ongoing efforts to move into the news business thus shouldn't be news to anyone, the HuffPo purchase was accurately described as "out-of-left-field" by analyst Rob Enderle. Left-wing too, for Arianna's eponymous site skews unmistakably liberal.

What's in it for each? AOL gets priceless "buzz" -- not to mention desperately needed ad dollars -- while at a stroke HuffPo goes mainstream and broadens its audience beyond an already impressive 25 million monthly eyeballs. Huffington, having parlayed a paltry $1 million investment six years ago into Monday's riches, is the one undisputed winner from the transaction, even as some say with a knowing wink (or Winklevoss) that the site was not even solely her creation.

Lauding the deal's benefits, Huffington said, "In this case, 1 + 1 = 11." Certainly 11 years from the fiasco of AOL's failed merger with Time Warner (TWX), which employed similarly fuzzy math, the transaction involves considerably less downside and in Enderle's opinion "could put AOL back on the map." It may be be hopelessly unhip to the Facebook and Twitter generation, but AOL still commands more than 36 million unique monthly visitors to its home page, and other popular properties include MapQuest and Moviefone. The combination, expected to close in the spring, is seen as generating 30% profit margins and $50 million in revenue for 2011.

Peanuts in the big picture -- AOL did $2.42 billion in turnover during 2010, but still arguably a step in the right direction.

Please see In AOL's Eyes, How Could Yahoo Look Better Than Time Warner?,The Periodic Table of Finance Bloggers, and How the Media Covered the Recession.

Testifying again to the market's fondness for amnesia, a couple erstwhile bad boys were back in favor big time yesterday. American International Group (AIG) shares gained 5.45%, which sounds impressive until set against Fannie Mae (FNMA), which finished 20.25% higher after imploding on Friday. (Before getting too excited it's worth noting this surge, much of which was given back after-hours, took the stock up to all of $0.75.)

It comes ahead of a White House proposal expected this week proposing that Fannie and fellow government-sponsored enterprise Freddie Mac (FMCC) see their share of the mortgage market cut from roughly 95% now to under 50%. The aim would be to accomplish this by lowering mortgage sizes and raising insurance fees.

Fannie Mae, whose very name -- like its former CEO -- was literally Mudd during the depths of the housing crisis, still holds about $789 billion in its portfolio. We will get greater clarity on what the future holds with a white paper and House hearing on Wednesday. But with some prominent Republicans now calling for its elimination entirely and Democrat Barney Frank being a seriously unreliable character witness, having said both GSEs were "fundamentally sound" and "in good shape going forward" just before disaster hit, investors expecting Fannie will find friends on the Hill look likely to be disappointed.

Turn to History Repeats Itself: Wall St Wants a Part of Fannie and Freddie's Gov't-Guaranteed Deal and FCIC Investigation Misses Broader Cause of Financial Crisis; Next Crisis Already Brewing for more.

Cisco Systems (CSCO), up 5.4% last week ahead of tomorrow's quarterly announcement, is doing just fine but the same sadly can't be said for Sysco Corp. (SYY). Shares in North America's largest food service distributor slid 6.16%, the S&P 500's single worst performance, after second-quarter profit fell 4% on higher costs, a common refrain these days. It earned $258.2 million, or $0.44 on an per share earnings basis, below year-ago numbers of $268.3 million and $0.45, respectively. Revenue did rise almost 6% to $9.38 billion, with the firm doing an admirable job of passing on inflation pressures to its customers, but EPS still came in two pennies short of what Wall Street was looking for.

Double-digit increases were seen in the prices of meat, dairy and seafood, and Sysco suffered from coming up against much more challenging comps versus the deflationary environment of 12 months earlier. Combine a 5.9% increase in operating expenses with margins contracting by 50 basis points to 4.7%, and good news was in short supply.

Morningstar analyst Erin Sherin spoke both rhyme and reason when she said, "It is unlikely that these pressures are going to subside near term," and even company CEO Bill DeLaney admitted, "Financial results may be somewhat choppy due to the economic challenges that consumers continue to face."

The stock does boast a relatively stable dividend yield of about 3.71% but looks range bound until we get greater earnings visibility.

Also check out How Livestock Prices Are Influencing Relative Food Price Inflation and Grocery Stores Now Stocking Savings.

Advertising giant Omnicom Group (OMC) ended off 0.23% in an up market. Profit-taking ahead of earnings likely played a role, the stock having hit a fresh 52-week peak on Friday, although another factor may have disappointed Don Draper investors out there. An admittedly unscientific watercooler survey suggests that the Madison Avenue outfit, which has historically cleaned up at the Super Bowl, didn't bring its best stuff to this year's football fiesta. Ever since Apple's (AAPL) iconic 1984 ad, whose one and only airing occurred at that year's Super Bowl XVIII, commercials have commanded center stage at the showpiece event.

This year Omnicom agencies produced spots for the likes of Snickers and Chevrolet, but in the case of the latter, the bar, or rather Roseanne Barr, may have been set a little too high. The Wall Street Journal opined that it "failed to live up to the buzz of last year's Betty White ad" and was one of "several star-studded" ones that "flopped." (Interestingly enough some of the best-received entries were again PepsiCo's (PEP) Doritos ads, made by amateurs.)

Since Omnicom CEO John Wren is an accountant by training he would have hoped for more bang for the buck, especially with a 30-second commercial averaging $2.9 million. Still, there's a reason why shares are up more than 35% in the past year. Profit margins have held up well even in a soft economy with the company keeping a tight rein on fixed costs. Organic revenue growth of 6.7% in the third quarter comfortably beat Street consensus, and the fourth quarter is expected to see a big benefit from US midterm election spending.

Currency risk can't be ignored however, with the firm deriving almost 50% of its revenue from outside North America.

Read related content at 10 Super Bowl Halftime Shows That Made Me Want To Set My Spaceship On Fire, Roger Sterling, Symbol of Corporate Fecklessness, to be Face of Lincoln Brand and When Ads Go Strange: Skittles Follows Rainbow to Surreal Place.
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