United States | Equity Research

Media | Internet
October 15, 2010
AOL, INC. Ken Sena Anupam K. Palit, CFA
212 822 7520 212 497 0844
AOL | $24.95
ken.sena@evercore.com anupam.palit@evercore.com
OVERWEIGHT | TARGET PRICE: $32
Commentary

Company Statistics
Market Capitalization $2,521
The Takeout that Makes Most Sense
Enterprise Value $2,198 Increasing Target Price from $30 to $32, Reiterate Overweight
Average 10-Day Volume 605
Contrary to recent speculation that AOL, along with a group of private
52-Week Price Range $19.61 - $29.45 equity investors, including Silver Lake, could be making a play for
Yahoo!, we find a reverse scenario, one in which Yahoo! buys AOL
directly, to be the more likely of the two outcomes.

We explain several YHOO and AOL acquisition scenarios and, through
Earnings Summary the assistance of outside legal M&A counsel, explain a few potential
2009A 2010E 2011E roadblocks. As a result of this and other analysis, we believe the only
Revenue (M) $3,207 $2,376 $2,053 straight-forward path to consolidation of these two entities is for Yahoo! to
EBITDA (M) $1,046 $667 $592 buy AOL.
Adjusted OIBDA (M) $1,045 $667 $592
Adjusted EPS $3.54 $1.81 $1.82
A combination of AOL and Yahoo! makes sense to us, given the
EV/EBITDA (x) 1.6x 2.5x 2.8x improving growth prospects in overall display, shared company
P/E (x) 6.7x 13.1x 13.0x objectives, and potential for cost savings. However, recent scenarios
Search Revs Growth % -16% -28% -12% suggested, such as AOL partnering with private equity to buy Yahoo! or
Ad Revs Growth % -17% -37% -0% both entities getting going private before combining are not reasonable
Display Revs Growth % -17% -14% -2% expectations in our view.
Sub. Revs Growth % -28% -28% -25%

To help sort out the potential upside in these names from a possible
Adjusted EPS: Q1 $1.15A $0.54A transaction, we provide an “expected value” analysis in which we assign
Q2 $0.97A $0.49A probabilities to the various outcome potentials. Based on this analysis,
Q3 $0.78A $0.35E we view 8% of potential takeout upside for AOL ($2 per share) which we
Q4 $0.64A $0.43E are factoring into our newly revised target price of $32 (vs. $30
FY $3.54A $1.81E $1.82E
previously). We note that our $32 target price is also supported by our
previously published consolidated DCF.

We continue to view AOL as having attractive valuation, strong
management and the right strategic course. The only difference now is
that we view the likelihood for an AOL takeout by Yahoo! specifically as
2 Year Price History potentially heightened. We place the probability of this transaction
AOL Inc. vs. S&P 500 occurring at ~20% based on our expected value analysis.
13-Oct-2008 to 13-Oct-2010 Price (Local Currency)
AOL Inc. (Left)
S&P 500 (Right)

Assuming an acquisition of AOL did happen, we estimate that 30% of
30 1,300
1,200
AOL’s branded display expenses could be rationalized over the next
25
1,100 three years, which would swing our present value estimation of the
1,000 Branded Display business to $5 per AOL share from negative $7
900
20
800
presently. We note the street to be imputing over $10 in negative value
700
per share for this business based on our estimates.
15 600
1/09 4/09 7/09 10/09 1/10 4/10 7/10 10/10
AOL currently trades at 13.7x our 2011 EPS estimate of $1.82 and at
Source: FactSet Prices 9.3x excluding cash. On an EV/EBITDA basis, the stock trades at 2.9x.
Source: Our target price implies that AOL can trade at a 17.5x PE (13.2x ex-cash)
on our 2011 estimates. Our target price suggests a 15.5% FCF yield,
which excludes cash.

Please see the analyst certification and important disclosures at the end of this report. Evercore Group L.L.C. and affiliates do and
seek to do business with companies covered in its research reports. Investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
October 15, 2010

The Takeout That Makes Most Sense

Contrary to recent speculation that AOL, along with a group of private equity investors,
including Silver Lake, could be making a play for Yahoo!, we find a reverse scenario, one
in which Yahoo! buys AOL directly, to be the more likely of the two outcomes. In this
report, we explain several YHOO and AOL acquisition scenarios and, through the
assistance of outside legal M&A counsel, explain a few potential roadblocks. We also
provide an “expected value” analysis whereby we assign probabilities to the various
outcome potentials. Based on our expected value analysis, we view 8% of potential
takeout upside for AOL ($2 per share) which we are factoring into our revised target price
of $32 per share.

Moreover, we believe a combination of AOL and Yahoo! makes sense, given the improving
growth prospects in overall display, shared company objectives, and potential for cost
synergies. However, we believe the only straight-forward path to consolidation of these
two entities is for Yahoo! to buy AOL outright. Scenarios in which AOL partners to buy
Yahoo! with the help of private equity or in which AOL and Yahoo! get acquired
simultaneously are not feasible based on our analysis of the transaction complexities
involved.

We continue to view AOL as having attractive valuation, strong management and the right
strategic course. The only difference now is that we view the likelihood for an AOL takeout
by Yahoo! as heightened. We place the probability of this transaction occurring at ~20%
based on our expected value analysis. Assuming an acquisition of AOL did happen, we
estimate that 30% of AOL’s branded display expenses could be rationalized over the next
three years, which would swing our present value estimation of the Branded Display
business to $5 per AOL share from negative $7 presently. We note the street to be
imputing over $10 in negative value per share for this business based on our estimates.

Background
According to the Wall Street Journal, AOL is in talks with several private equity firms,
including Silver Lake Partners, Blackstone Group, and "two or three other firms" to explore
a potential acquisition of Yahoo!. While the WSJ indicated the discussions are preliminary
and do not as of yet involve Yahoo! management, Bloomberg separately reported that the
latter has retained Goldman Sachs to help defend against a possible takeover.
The WSJ specifically mentioned two potential takeover possibilities. The first scenario
would involve Yahoo! divesting a number of assets, including its 40% stake in Alibaba
Group, thereby making the acquisition more manageable for AOL and private equity
investors to absorb. The second scenario would see AOL and Yahoo! combine in a reverse
merger, suggesting that AOL management would potentially run the newly combined
entity. In addition, a third scenario was implied by asserting that AOL could also go
private before being combined with Yahoo!

Combining AOL & Yahoo!: the Logistics

Through the assistance of an outside M&A legal specialist, we provide a breakdown of the
more specific complications associated with each of the scenarios. As a result of these
conversations, we believe the only way to bring AOL and Yahoo! together, something we
feel makes sense for shareholders on both sides, is if Yahoo! buys AOL directly.

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October 15, 2010

AOL & Private Equity for YHOO is a Non-Starter

Under Delaware law and Business Judgment Rule, there is heightened scrutiny around
sales of corporate control where the appearance of conflict exists. A sale in which AOL
buys Yahoo! with the help of private equity investors creates such an appearance. The
conflict rests in the fact that AOL’s management team would conceivably be allowed to run
the ongoing entity, raising ire with investors over the fact that control has been exchanged
for the sake of “empire building” by management. We do not see there being anyway
around the so-called appearance issue given that AOL shareholder’s stake could be
reduced to as little as 8-13% of the NewCo, depending on deal structure, for potentially no
premium.

Figure 1: Examples of AOL Shareholder Dilution Under AOL for YHOO Scenario

2010E
AOL - Cash End of Year $865.1
+ Private Equity Cash $16,567.7
= Total Yahoo EV (ex OBS Assets) $17,432.8
+ OBS Assets (net of Tax) $7,498.7
= Total Yahoo EV $24,931.5
+ AOL EV $1,647.1
= Combined EV $26,578.6

AOL % Share of New Co (x Y! OBS Assets)

Combined EV (excluding OBS) $19,079.9
- Cash Contributed from Private Equity $16,589.5
= AOL Shareholder Stake $2,490.4
AOL % Holding (No YHOO OBS Assets) 13.1%

AOL % Share of New Co (x Y! OBS Assets)

Combined EV $26,578.6
- Cash Contributed from Private Equity $24,088.2
= AOL Shareholder Stake $2,490.4
AOL % Holding 9.4%

AOL % Share of New Co (+ 25% prem on Y! Shares)

Combined EV (plus 25% premium on YHOO shares) $30,936.8
- Cash Contributed from Private Equity $28,446.4
= AOL Shareholder Stake $2,490.4
AOL % Holding 8.0%
Source: Company data, Evercore Group L.L.C. Research

AOL & YHOO Rolled Up Together Also Unlikely

Another scenario expressed is that private equity could manage to somehow bring Yahoo!
and AOL both private before combining them. We do not see this scenario as likely either.
The challenge with taking both companies private at once has to do with shareholder
fiduciary issues, similar to what we described above, and the potential for restrictive and
less favorable deal financing terms, given that financing must be done separately for each
of the transactions. From a board fiduciary standpoint, the same “conflict appearance”
statute still applies. This would be an issue if indeed the plan is to have AOL current
management running the NewCo. While the appearance of conflict is mitigated given the
acquisition, it would still likely set into motion a “special committee” process which would
take time and open up the bidding process to shareholders and potentially other suitors. In
other words, as long as management is receiving some additional benefit, the appearance
of conflict is still present.

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October 15, 2010

Upside Potential Based on Expected Outcomes

By conducting an expected value analysis on the transaction probabilities above, we arrive
at a probability-based expected value upside under each scenario. First we place the
chances of a deal happening at all at 33%. We view this as reasonable in light of mounting
frustration on the part of Yahoo! shareholders and attractive valuations at both companies.
Then, assuming a deal does happen, we assign probabilities as to the type of deal that
would be most likely. As a result of our outside legal M&A discussions, we assign only a
5% chance of AOL and private equity managing to acquire Yahoo!. Then, based on these
same discussions, we assign roughly a 35% likelihood to a transaction type in which
Yahoo! and AOL are taken out together. We note that multiplying this likelihood by the
probability that a transaction happens at call gets us to a 9% likelihood. As we discussed
before, under this second scenario, while there is lower "apparent conflict" risk, it does still
present certain board fiduciary and financing obstacles that would not be present under a
straight merger of Yahoo! for AOL. As a result, we leave the remaining deal type likelihood
as being a Yahoo! takeout of AOL. We note that our 33% probability that a transaction
occurs at all, multiplied by our 60% likelihood assumption that it would be a Yahoo! takeout
of AOL, equals a roughly 20% probability that deal will occur. We view this estimate as
reasonable in light of attractive AOL valuation, shared company objectives, and the
potential for cost synergies. Next, we assign purchase premiums in which we roughly
assign Yahoo! and AOL 25% purchase premiums assuming takeout. Then, if we apply
probability weighting to each potential outcome, we reach an expected upside of 8% for
AOL and flat upside for YHOO, which reflects the potential takeout upside of Yahoo! being
offset by the potential that the deal doesn’t happen.

Figure 2: Upside Potential Based on Expected Value Analysis

Transaction Analysis

Transaction No Transaction
Overall Transaction Probability 33% 67%

Scenario 1 Scenario 2 Scenario 3

(AOL & PE buy YHOO) (YHOO buys AOL) (PE Buys Both)
x Scenario Probability - Assuming Transaction 5% 60% 35%
= Probability Under Each Scenario 1.7% 19.8% 11.6% 67.0%

Estimated Share Price Reaction

AOL 0.0% 25.0% 25.0% 0.0%
YHOO 25.0% 0.0% 25.0% -5.0%
Upside Based on
Expected Value Adjusted Share Price Reaction Expected Value
AOL 0.0% + 5.0% + 2.9% + 0% = 7.8%
YHOO 0.4% + 0.0% + 2.9% + -3% = 0.0%

Source: Company data, Evercore Group L.L.C. Research

Why AOL / YHOO Combo Makes Sense

We believe a combination of the AOL and Yahoo! businesses makes a lot of sense given
the improving growth prospects in overall display, the fact that both companies face a
similar predicament in terms of systemic audience erosion, the companies’ shared view
that local and branded content initiatives could be an answer to continued audience
erosion, and the potential for cost savings.

Improving Display Trends

For more information on the potential growth prospects for display, including our long-term
forecasts, please see our industry report: It’s time to Face the future: Openness, Sharing &
th
Data Is Changing Online Advertising, from September 27 , 2010. In that report, we walk
the improvements in display targeting and buying efficiencies that are leading to faster
growth in display advertising overall. For the purposes of this note, we will just summarize
a few of the display trends we think are key, including the growth of demand-side
platforms, real-time bidding, audience targeting, and better ad formats, particularly related
to video and sponsored mobile.

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October 15, 2010

We show below how the display buying landscape has shifted from primarily direct
purchase to one that is highly interconnected. At each stage of development, advertisers
are offered increased buying efficiency and more choice. This is leading to overall growth
in display.

Figure 3: Evolution of Display Buying

Advertiser Publisher

Direct: Advertiser Publisher

(inefficient) Advertiser Publisher

Ad Network 1
$1.00 Ad Network 3 Ad Network 5
$0.64 $0.41
Ad Networks: Publisher
Advertiser
Ad Network 2
Ad Network 4 Ad Network 6
(inefficient)
$0.80 $0.51 $0.33

Advertiser Publisher
E xchanges: Ad Network 1 Ad Network 6
Advertiser Exchange Ad Network 5 Publisher
(efficient) Ad Network 2
Advertiser Ad Network 3 Ad Network 4 Publisher

Demand-Side Exchange1
Advertiser Publisher
Platforms:
DSP Yield
Advertiser Exchange2 Publisher
(More efficient) Optimizer

Advertiser Exchange3 Publisher

DSPs Capable of Optimizing Across Multiple Exchanges

Source: Company data, Evercore Group L.L.C. Research

However, for premium display publishers, such as AOL and Yahoo!, the combination of
greater choice for advertisers and eroding audience usage, has largely weakened their
hold on display and created doubt around the companies’ abilities to capture emerging
display growth momentum.
Both Companies Face a Similar Predicament
As portals shrink as an overall portion of web views, these companies clearly need
reinvention.

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October 15, 2010

Figure 4: US Online Timespent Share by Category, 2007-1H10

57.3% 58.0% 51.9% 51.7%

100% Retail
6.1% 5.7% 3.9% 3.6%
90% 3.2% 3.1% 3.9% News/ Information
3.1%
80%

% of US Timespent
7.3% 8.4% 10.3% 11.0%
70% Entertainment
4.1%
60% 9.0%
10.0%
50% 12.1% Conversational Media
40%
30% 36.7%
31.7%
24.6% Portals
20% 21.1%
10%
0%
2007 2008 2009 1H10

Source: Company data, Evercore Group L.L.C. Research

Eyeing Same Local and Branded Content Objectives

Both companies are looking to use data to increasingly drive content and advertising, much
as it is done in search. AOL does get additional credit for its vision, however. To this end,
CEO Tim Armstrong has shown effectiveness in developing algorithmic content and
advertising technologies, including some separately from AOL, such as Associated
Content, which Yahoo! purchased for ~$100 million, and Patch, which was purchased by
AOL following his arrival. To make up for Associated Content going to Yahoo!, Tim
launched Seed, a similar business, to continue down the algorithmic content path.
Branded and local both represent large pockets of advertising that have yet to move to the
web in a big way, as compared to offline medias. By offering improved content,
professional, and locally created, the companies hope to secure some of this shift to
online. Roughly speaking, we estimate that local and branded could represent another $20
billion or so in online advertising in the U.S. alone if online can provide advertisers with as
good an experience online as off. As a result, AOL and Yahoo! are both focused on these
areas, but have yet to demonstrate victories in these areas.

Figure 5: U.S. Branded Online Ad Opportunity, 2009A Figure 6: Local Advertising Opportunity, 2009

$118 Bil $24 Bil $142 Bil $118 Bil $24 Bil $142 Bil
100% 100%

90% 25% 70% 32% National Ad Spend 90%

31% 76% 38%
80% 80% Direct Response
Advertising
70% 70%

60% 60%
~ $10-11 Bil Local
50% Online Opp'ty 50% ~ $10-11 Bil Branded
Online Opp'ty
40% 75% 40%
68% 69%
30% 30% 62% Branded Advertising

20% 20%
30% Local Ad Spend
10% 24%
10%
0% 0%
Traditional Average Online Total Offline Online Total

Source: Company data, Evercore Group L.L.C. Research Source: Company data, Evercore Group L.L.C. Research

Potential for Increased Cost Savings

From a cost savings standpoint, we assume the bulk of the synergy would come out of
Branded display. For simplicity, we assume that half of AOL’s branded display expenses,

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October 15, 2010

in which we note that AOL has a current burn rate in this business of roughly $260 million
by our estimates, could be rationalized. To start, we show below a snapshot of AOL’s
branded display business. We estimate in 2011 for this business to spend roughly $800
million dollars and that it will breakeven over the course of five years.

Figure 7: AOL Branded Display Business

2011E 2012E 2013E 2014E 2015E

Branded Display DCF
Branded Display Revenues $607 $617 $624 $633 $637
x EBITDA Margin (Implied) -43.7% -30.7% -19.9% -13.6% -9.1%
= Implied Branded Display EBITDA ($265.1) ($189.6) ($124.1) ($86.4) ($58.3)
PV of EBITDA (2011-2015) ($559.7)
+ PV of EBITDA Terminal Value ($203.9)
= PV of EBITDA (Branded Display) ($763.5)

Source: Company data, Evercore Group L.L.C. Research

Assuming a Yahoo! and AOL combination could strip 30% of the expenses out of AOL’s
branded display business over three years, the business swings to profitability, and we see
an incremental $1.2 billion in branded display’s present value, up from negative $700
million by our current estimates. We note that our branded display DCF assumes a 12.4%
WACC and negative 3% terminal growth rate.

Figure 8: AOL Branded Display Business Synergies

2011E 2012E 2013E 2014E 2015E

Branded Display DCF
Branded Display Revenues $607 $617 $624 $633 $637
- Expenses $872 $807 $748 $720 $695
+ Synergies $87 $161 $224 $216 $209
= Implied Branded Display EBITDA ($177.9) ($28.3) $100.2 $129.5 $150.3
PV of EBITDA (2011-2015) $54.6
+ PV of EBITDA Terminal Value $525.9
= PV of EBITDA (Branded Display) $580.5

2011E 2012E 2013E 2014E 2015E

Branded Display Expenses $872.2 $806.7 $747.7 $719.6 $695.1
'x % Savings AOL Branded Display 10% 20% 30% 30% 30%
= Synergies $87.2 $161.3 $224.3 $215.9 $208.5

Source: Company data, Evercore Group L.L.C. Research

In sum, just assuming the two companies can cut 30% of AOL’s branded display expenses
over three years (without making any such adjustment on the YHOO side), gets this
business to profitability in year three. In fact, our valuation of the Branded Display
business swings from negative $7 per share to positive $5 if this happens.

However, for now, we view the more prudent approach to sizing the takeout opportunity for
AOL is to base the upside on the expected value analysis, previously described. In that
analysis, under exhibit 2, we show that based on all the various scenarios, we find an
additional 8% expected value upside, or $2 per share. Adding the $2 per share to our
underlying valuation work gets us to a $32 target price.

Figure 9: Adding Another 7.5% Upside to AOL Target Price Based on Strategic Event

% Upside $ per Share

Closing Price (10/14) $25.0
DCF Expected Upside 18.8% $4.7
+ Expected Value Strategic Event 7.8% $2.0
= Revised Target Upside 26.6% $31.6
Source: Company data, Evercore Group L.L.C. Research

For detail, we provide our SOTP analysis below.

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October 15, 2010

Figure 10: AOL SOTP Analysis Based on DCF by Business

Ad Non- Branded Combined
Search Access Networking Performing Display, Other SOTP
PV of EBITDA $1,859.8 $1,606.2 $139.4 ($763.5) $2,841.8
+ PV of Capital Expenditures ($861.7) ($861.7)
= PV of Est. FCF $1,859.8 $1,606.2 $139.4 ($861.7) ($763.5) $1,980.1
/ EBITDA (2011) $331.1 $510.8 $14.8 ($463.7) ($265.1) $591.6
= EV / EBITDA Multiple 5.6x 3.1x 9.4x 1.9x 2.9x 3.3x
.
FCF Valuation $1,859.8 $1,606.2 $139.4 ($861.7) ($763.5) $1,980.1
+ Cash (2010 EOY) $843.2 $843.2
+ Real Estate $344.4 $344.4
= Equity Value (Based on SOTP) 1,859.8 1,606.2 139.4 325.9 (763.5) 3,167.7
/ Shares 106.7 106.7 106.7 106.7 106.7 106.7
= Equity Value per Share $17.4 $15.1 $1.3 $3.1 ($7.2) $29.7
= Take Out Premium $2.0 $2.0
= Equity Value per Share (Adjusted) $17.4 $15.1 $1.3 $3.1 ($5.2) $31.6

Source: Company data, Evercore Group L.L.C. Research

We note that our increased target price to $32 is also supported by our consolidated DCF,
which assumes a negative 2% terminal growth rate and a 12.4% weighted average cost of
capital.

Figure 11: Consolidated DCF of AOL Business

CAGR '10E-
2011E 2012E 2013E 2014E 2015E '15E
EBITDA $591.6 $516.1 $474.7 $441.4 $414.1 (9.1)%
Net Income 173.4 170.2 154.8 157.2 171.5 (171.0)%
+ Depreciation & Amortization 322.7 259.5 251.0 221.0 176.6 (13.8)%
+ Other Non-Cash Charges (Benefits) 44.3 33.7 47.1 40.6 38.5 (51.4)%
+ After Tax Interest Expense (Income) 15.8 20.4 25.1 30.0 34.6 43.3%
+ Changes in Operating Assets & Liabilities (51.0) (27.1) (25.5) (12.0) (11.4) (32.6)%
= Cash Flows $505.1 $456.6 $452.6 $436.8 $409.9 (11.7)%
- Capital Expenditures 91.3 87.7 86.4 87.7 89.7 (2.3)%
= Free Cash Flows $413.8 $369.0 $366.1 $349.2 $320.2 (13.5)%
Y/Y % Change (37.5)% (10.8)% (0.8)% (4.6)% (8.3)%

Terminal FCF $314

x Terminal FCF Multiple 6.9x
= Terminal Value $2,174.4

Weighted Average Cost of Capital 12.4%

Perpetual FCF Growth Rate ("G") (2.0)%

2011E
NPV of Free Cash Flows $1,314.3
+ Present Value of Terminal Value $1,210.4
= Enterprise Value $2,524.8
- Year End Net Debt (Cash) 2010 ($843.2)
= Equity Value $3,368.0
/ Diluted Shares Outstanding 106.7
= Equity Value Per Share $31.57

Source: Company data, Evercore Group L.L.C. Research

Valuation & Investment Conclusion

We continue to view AOL as having attractive valuation, strong management and the right
strategic course. The only difference now is that we view the likelihood for an AOL takeout
by Yahoo! specifically as potentially heightened. We place the probability of this
transaction occurring at ~20% based on our expected value analysis. AOL currently trades
at 13.7x our 2011 EPS estimate of $1.82 and at 9.3x excluding cash. On an EV/EBITDA
basis, the stock trades at 2.9x. Our target price implies that AOL can trade at a 17.5x PE
(13.2x ex-cash) on our 2011 estimates. Our target price suggests a 15.5% FCF yield,
which excludes cash.

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October 15, 2010

Figure 12: Comparative EV/EBITDA Multiples, 2010-2012E

GOOG YHOO AOL
10/14/2010 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E
Stock Price $540.93 $15.93 $24.95
x Shares Outstanding 322.8 1,390.6 106.7
= Equity Market Cap $174,618.3 $22,152.5 $2,662.2

Net Debt (Cash) (33,049.8) (4,320.6) (843.2)

+ Other Adjustments 0.0 0.0 0.0
= Adjusted Enterprise Value 141,568.5 17,832.0 1,818.9
- Off Balance Sheet Assets 350.0 7,498.7 0.0
+ Minority Interest 0.0 13.5 0.0
= Enterprise Value $141,218.5 $141,218.5 $141,218.5 $10,346.8 $10,346.8 $10,346.8 $1,818.9 $1,818.9 $1,818.9
/ EBITDA* 13,130.7 15,070.6 17,742.1 1,716.3 2,004.9 2,320.2 703.7 628.6 553.1
= EV/EBITDA Multiple (x-Stock comp) 10.8x 9.4x 8.0x 6.0x 5.2x 4.5x 2.6x 2.9x 3.3x

Source: Company data, Evercore Group L.L.C. Research; *EBITDA excludes non-cash stock option expense

Figure 13: Comparative PE Multiples, 2010-2012E

GOOG YHOO AOL
10/14/2010 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E
Stock Price $540.93 $540.93 $540.93 $15.93 $15.93 $15.93 $24.95 $24.95 $24.95
/ Proforma EPS (x-Stock comp) 28.64 32.68 38.30 0.60 0.74 0.86 1.81 1.82 1.78
= P/E (x-Stock Comp) 18.9x 16.5x 14.1x 26.7x 21.5x 18.6x 13.8x 13.7x 14.0x

Stock Price $540.93 $540.93 $540.93 $15.93 $15.93 $15.93 $24.95 $24.95 $24.95
YE10 Cash/Share (102.38) (102.38) (102.38) (8.50) (8.50) (8.50) (7.90) (7.90) (7.90)
Stock Price (x-Cash) 438.55 438.55 438.55 7.43 7.43 7.43 17.05 17.05 17.05
/ Proforma EPS (x-Stock comp) 28.64 32.68 38.30 0.60 0.74 0.86 1.81 1.82 1.78
= P/E (x-Stock Comp, OBS & Cash) 15.3x 13.4x 11.4x 12.4x 10.0x 8.7x 9.4x 9.3x 9.6x

PEG 1.3x 1.1x 1.0x 1.6x 1.3x 1.1x n.m. n.m. n.m.
PEG (x-Cash, OBS) 1.1x 0.9x 0.8x 0.7x 0.6x 0.5x n.m. n.m. n.m.

P/E 15.3x 13.4x 11.4x 12.4x 10.0x 8.7x 9.4x 9.3x 9.6x
/ Market Multiple 15.5x 12.8x 12.9x 15.5x 12.8x 12.9x 15.5x 12.8x 12.9x
-1 1 1 1 1 1 1 1 1 1
= Premium (Discount) to Market -1.4% 4.5% -11.0% -19.9% -21.7% -32.7% -39.3% -27.2% -25.4%

Source: Company data, Evercore Group L.L.C. Research; EPS excludes non-cash stock option expense

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October 15, 2010

Figure 14: Comparative FCF Multiples, 2010E-2012E

GOOG YHOO AOL
10/14/2010 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E
= C/F from Ops $11,007.8 $13,170.6 $14,875.7 $1,487.8 $1,726.2 $1,780.9 $757.0 $489.3 $436.2
- CAPEX 1,611.1 2,205.7 2,871.9 585.3 599.2 632.6 100.6 91.3 87.7
= FCF 9,396.7 10,964.9 12,003.8 902.6 1,127.0 1,148.3 656.4 398.0 348.6
/ EBITDA* 13,130.7 15,070.6 17,742.1 1,716.3 2,004.9 2,320.2 703.7 628.6 553.1
= FCF/EBITDA Conversion 71.6% 72.8% 67.7% 52.6% 56.2% 49.5% 93.3% 63.3% 63.0%

Free Cash Flow $9,396.7 $10,964.9 $12,003.8 $902.6 $1,127.0 $1,148.3 $656.4 $398.0 $348.6
/ Shares Outstanding 322.8 322.8 322.8 1,390.6 1,390.6 1,390.6 106.7 106.7 106.7
= Free Cash Flow per Share $29.11 $33.97 $37.19 $0.65 $0.81 $0.83 $6.15 $3.73 $3.27

Stock Price $540.93 $540.93 $540.93 $15.93 $15.93 $15.93 $24.95 $24.95 $24.95
/ Free Cash Flow per Share 29.11 33.97 37.19 0.65 0.81 0.83 6.15 3.73 3.27
= P/FCF Multiple 18.6x 15.9x 14.5x 24.5x 19.7x 19.3x 4.1x 6.7x 7.6x

Stock Price (x-Cash) $438.55 $438.55 $438.55 $7.43 $7.43 $7.43 $17.05 $17.05 $17.05
/ Free Cash Flow per Share 29.11 33.97 37.19 0.65 0.81 0.83 6.15 3.73 3.27
= P/FCF Multiple (x-Cash) 15.1x 12.9x 11.8x 11.4x 9.2x 9.0x 2.8x 4.6x 5.2x

FCF Yield 5.4% 6.3% 6.9% 4.1% 5.1% 5.2% 24.7% 15.0% 13.1%
FCF Yield (x-Cash) 6.6% 7.7% 8.5% 8.7% 10.9% 11.1% 36.1% 21.9% 19.2%

Source: Company data, Evercore Group L.L.C. Research; *EBITDA excludes non-cash stock option expense activity

10
October 15, 2010

Financials
Figure 15: AOL Income Statement, 1Q08-4Q10E
Qtr. Ending Mar Qtr. Ending Jun Qtr. Ending Sep Qtr. Ending Dec
1Q08 1Q09 1Q10 2Q08 2Q09 2Q10 3Q08 3Q09 3Q10E 4Q08 4Q09 4Q10E
Revenue
Subscription $538.8 $393.5 $282.7 $491.0 $355.7 $260.2 $470.1 $332.2 $238.4 $429.4 $307.4 $221.1
+ Advertising 540.4 431.7 345.8 517.3 407.2 296.9 487.0 402.3 $290.5 499.7 458.5 $327.7
+ Other 37.1 30.1 26.7 34.8 28.6 27.0 34.3 29.4 27.6 31.9 30.2 31.9
= Total Revenue $1,116.3 $855.3 $655.2 $1,043.1 $791.5 $584.1 $991.4 $763.9 $556.5 $961.0 $796.1 $580.6
- Cost of Revenue 619.9 481.7 362.5 597.0 460.9 333.3 542.5 449.2 345.0 503.6 492.3 360.0
- SG&A 171.1 136.0 131.3 177.7 122.4 126.1 148.0 144.1 128.0 137.6 127.2 133.5
- Amortization of Intangible Assets 36.5 34.8 62.2 39.8 33.3 35.7 42.2 31.6 31.7 40.5 38.2 31.7
- Amounts Related to Litigation, Net 3.9 7.4 0.0 4.1 6.8 0.0 4.6 6.8 0.0 8.2 6.9 0.0
- Restructuring Costs 9.5 58.3 23.4 3.8 14.4 11.1 1.8 10.2 0.0 1.5 106.3 0.0
- Goodwill Impairment Charge 0.0 0.0 0.0 0.0 0.0 1,414.4 0.0 0.0 0.0 2,207.0 0.0 0.0
- Gain on Disposal of Assets, Net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.3) 0.0 0.0
= Operating Income (Loss) $275.4 $137.1 $75.8 $220.7 $153.7 ($1,336.5) $252.3 $122.0 $51.8 ($1,937.1) $25.2 $55.4
+ Other Income (Loss), Net 1.8 (3.2) (2.7) (1.6) 5.4 (4.3) 1.3 (3.6) 1.5 (5.7) (1.0) 11.4
= Income (Loss) from Continuing Operations $277.2 $133.9 $73.1 $219.1 $159.1 ($1,340.8) $253.6 $118.4 $53.2 ($1,942.8) $24.2 $66.8
- Income Tax 120.1 53.5 35.3 94.6 70.8 (269.3) 111.2 47.9 21.3 70.0 26.1 26.7
= Income from Continuing Operations $157.1 $80.4 $37.8 $124.5 $88.3 ($1,071.5) $142.4 $70.5 $31.9 ($2,012.8) ($1.9) $40.1
+ Discontinued Operations, Net 2.5 2.1 (3.1) 2.1 2.4 16.5 5.0 3.4 0.0 52.6 3.3 0.0
= Income Before Cum Change in Accounting $159.6 $82.5 $34.7 $126.6 $90.7 ($1,055.0) $147.4 $73.9 $31.9 ($1,960.2) $1.4 $40.1
+ Cum Effect of Accounting Change 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
= Net Income (Loss) $159.6 $82.5 $34.7 $126.6 $90.7 ($1,055.0) $147.4 $73.9 $31.9 ($1,960.2) $1.4 $40.1
+ Net Loss Attributable to Noncontrolling Interests 0.1 0.2 0.0 0.3 0.0 0.0 0.1 0.1 0.0 0.3 0.0 0.0
= Net Income (Loss) Attributable to AOL $159.7 $82.7 $34.7 $126.9 $90.7 ($1,055.0) $147.5 $74.0 $31.9 ($1,959.9) $1.4 $40.1
/ Diluted Shares Outstanding 105.8 105.8 107.0 105.8 105.8 106.7 105.8 105.8 106.7 105.8 105.9 106.7
= Diluted EPS Attributable to AOL $1.51 $0.78 $0.32 $1.20 $0.86 ($9.89) $1.39 $0.70 $0.30 ($18.52) $0.01 $0.38
= Diluted EPS from continuous operations $1.48 $0.76 $0.35 $1.18 $0.83 ($10.04) $1.35 $0.67 $0.30 ($19.02) ($0.02) $0.38

GAAP & Non-GAAP Reconcialition

Income from Continuing Operations $157.1 $80.4 $37.8 $124.5 $88.3 ($1,071.5) $142.4 $70.5 $31.9 ($2,012.8) ($1.9) $40.1
+ Stock Comp Expense, net of tax $2.9 $1.9 $5.6 $2.9 $1.9 $5.6 $2.9 $1.9 $5.6 $2.9 $1.9 $5.6
+ Restructuring Costs, net of tax $8.0 $39.4 $14.0 $4.7 $12.7 $6.7 $3.8 $10.2 $0.0 $5.6 $67.9 $0.0
+ Goodwill Impairment Charge, net of tax $0.0 $0.0 $0.0 $0.0 $0.0 $1,111.7 $0.0 $0.0 $0.0 $2,207.0 $0.0 $0.0
+ Gain on Disposal of Assets, Net of tax $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 ($0.2) $0.0 $0.0
= Net Income (x 1x items) $168.1 $121.7 $57.4 $132.2 $102.9 $52.4 $149.2 $82.6 $37.5 $202.6 $67.9 $45.6
/ Share Outstanding - Diluted 105.8 105.8 107.0 105.8 105.8 106.7 105.8 105.8 106.7 105.8 105.9 106.7
= Adjusted EPS - Diluted $1.59 $1.15 $0.54 $1.25 $0.97 $0.49 $1.41 $0.78 $0.35 $1.91 $0.64 $0.43
Adjusted EBITDA (Incl. Restructuring) $394.8 $242.1 $192.6 $339.9 $262.8 $166.6 $382.1 $225.8 $126.0 $399.6 $125.3 $129.4

Y/Y % Change
Revenue
Subscription (38.3)% (27.0)% (28.2)% (28.9)% (27.6)% (26.8)% (26.0)% (29.3)% (28.2)% (27.1)% (28.4)% (28.1)%
Advertising (1.5)% (20.1)% (19.9)% (0.9)% (21.3)% (27.1)% (9.9)% (17.4)% (27.8)% (19.4)% (8.2)% (28.5)%
Other 2.2% (18.9)% (11.3)% (14.1)% (17.8)% (5.6)% (20.4)% (14.3)% (6.0)% (24.6)% (5.3)% 5.6%
Total Revenue (23.4)% (23.4)% (23.4)% (16.8)% (24.1)% (26.2)% (18.6)% (22.9)% (27.1)% (23.2)% (17.2)% (27.1)%
Cost of Revenue (12.7)% (22.3)% (24.7)% (8.7)% (22.8)% (27.7)% (15.2)% (17.2)% (23.2)% (22.5)% (2.2)% (26.9)%
SG&A (40.5)% (20.5)% (3.5)% (16.8)% (31.1)% 3.0% (39.5)% (2.6)% (11.2)% (37.0)% (7.6)% 5.0%
Amortization of Intangible Assets 68.2% (4.7)% 78.7% 91.3% (16.3)% 7.2% 58.1% (25.1)% 0.3% 51.7% (5.7)% (17.0)%
Operating Income (Loss) (70.1)% (50.2)% (44.7)% (38.3)% (30.4)% (969.6)% (16.4)% (51.6)% (57.6)% (812.4)% (101.3)% 119.8%
Other Income (Loss), Net (116.5)% (277.8)% (15.6)% (140.0)% (437.5)% (179.6)% (83.1)% (376.9)% (140.7)% (1525.0)% (82.5)% (1239.3)%
Income Tax (56.5)% (55.5)% (34.0)% (32.3)% (25.2)% (480.4)% (7.5)% (56.9)% (55.5)% (33.8)% (62.7)% 2.4%
Income from Continuing Operations (75.3)% (48.8)% (53.0)% (43.9)% (29.1)% (1313.5)% (24.7)% (50.5)% (54.7)% (1308.9)% (99.9)% (2209.1)%
Adjusted EPS Diluted (27.6)% (53.4)% (22.2)% (49.5)% (44.6)% (55.0)% (66.5)% (33.3)%
Adjusted EBITDA (38.7)% (20.4)% (22.7)% (36.6)% (40.9)% (44.2)% (68.6)% 3.3%

% of Revenue/Margins
Subscription 48.3% 46.0% 43.1% 47.1% 44.9% 44.5% 47.4% 43.5% 42.8% 44.7% 38.6% 38.1%
Advertising 48.4% 50.5% 52.8% 49.6% 51.4% 50.8% 49.1% 52.7% 52.2% 52.0% 57.6% 56.4%
Other 3.3% 3.5% 4.1% 3.3% 3.6% 4.6% 3.5% 3.8% 5.0% 3.3% 3.8% 5.5%
Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 55.5% 56.3% 55.3% 57.2% 58.2% 57.1% 54.7% 58.8% 62.0% 52.4% 61.8% 62.0%
Gross Margin 44.5% 43.7% 44.7% 42.8% 41.8% 42.9% 45.3% 41.2% 38.0% 47.6% 38.2% 38.0%
SG&A 15.3% 15.9% 20.0% 17.0% 15.5% 21.6% 14.9% 18.9% 23.0% 14.3% 16.0% 15.2%
Restructuring Costs 0.9% 6.8% 3.6% 0.4% 1.8% 1.9% 0.2% 1.3% 0.0% 0.2% 13.4% 0.0%
Amortization of Intangible Assets 3.3% 4.1% 9.5% 3.8% 4.2% 6.1% 4.3% 4.1% 5.7% 4.2% 4.8% 5.5%
Operating Margin 24.7% 16.0% 11.6% 21.2% 19.4% (228.8)% 25.4% 16.0% 9.3% (201.6)% 3.2% 9.5%
Other Income (Loss), Net 0.2% (0.4)% (0.4)% (0.2)% 0.7% (0.7)% 0.1% (0.5)% 0.3% (0.6)% (0.1)% 2.0%
Income Tax 10.8% 6.3% 5.4% 9.1% 8.9% (46.1)% 11.2% 6.3% 3.8% 7.3% 3.3% 4.6%
Income from Continuing Operations 14.1% 9.4% 5.8% 11.9% 11.2% (183.4)% 14.4% 9.2% 5.7% (209.4)% (0.2)% 6.9%

Tax Rate 43.3% 40.0% 48.3% 43.2% 44.5% 20.1% 43.8% 40.5% 40.0% (3.6)% 107.9% 40.0%

Source: Company data, Evercore Group L.L.C. Research

11
October 15, 2010

Financials
Figure 16: AOL Income Statement, 2008-2015E
CAGR
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10E-'15E
Revenue
Subscription $1,929.3 $1,388.8 $1,002.3 $748.5 $585.1 $478.8 $408.4 $353.4 (18.8)%
+ Advertising $2,044.4 $1,699.7 1,260.9 $1,195.0 $1,179.8 $1,169.3 $1,173.3 $1,185.6 (1.2)%
+ Other $138.1 $118.3 113.2 109.7 112.5 115.3 121.1 121.1 1.4%
= Total Revenue 4,111.8 3,206.8 2,376.4 2,053.2 1,877.4 1,763.4 1,702.8 1,660.1 (6.9)%
- Cost of Revenue 2,263.0 1,884.1 1,400.8 1,218.7 1,143.7 1,078.2 1,045.1 1,009.6 (6.3)%
- SG&A 634.4 529.7 518.9 459.7 424.1 405.9 390.9 386.6 (5.7)%
- Amortization of Intangible Assets 159.0 137.9 161.3 105.8 52.9 55.5 46.5 26.4
- Amounts Related to Litigation, Net 20.8 27.9 0.0 0.0 0.0 0.0 0.0 0.0
- Restructuring Costs 16.6 189.2 34.5 0.0 0.0 0.0 0.0 0.0
- Goodwill Impairment Charge 2,207.0 0.0 1,414.4 0.0 0.0 0.0 0.0 0.0
- Gain on Disposal of Assets, Net (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
= Operating Income (Loss) (1,188.7) 438.0 (1,153.5) 268.9 256.6 223.7 220.4 237.4 (172.9)%
+ Other Income (Loss), Net (4.2) (2.4) 5.9 20.0 27.1 34.3 41.7 48.4 52.6%
= Income (Loss) from Continuing Operations (1,192.9) 435.6 (1,147.7) 289.0 283.7 258.0 262.1 285.9 (175.7)%
- Income Tax 395.9 198.3 (186.0) 115.6 113.5 103.2 104.8 114.4 (190.7)%
= Income from Continuing Operations (1,588.8) 237.3 (961.7) 173.4 170.2 154.8 157.2 171.5 (170.8)%
+ Discontinued Operations, Net 62.2 11.2 13.4 0.0 0.0 0.0 0.0 0.0
= Income Before Cum Change in Accounting (1,526.6) 248.5 (948.3) 173.4 170.2 154.8 157.2 171.5 (171.0)%
+ Cum Effect of Accounting Change 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
= Net Income (Loss) (1,526.6) 248.5 (948.3) 173.4 170.2 154.8 157.2 171.5 (171.0)%
+ Net Loss Attributable to Noncontrolling Interests 0.8 0.3 0.0 0.0 0.0 0.0 0.0 0.0
= Net Income (Loss) Attributable to AOL (1,525.8) 248.8 (948.3) 173.4 170.2 154.8 157.2 171.5 (171.0)%
/ Diluted Shares Outstanding 105.8 105.8 106.7 107.2 108.3 109.4 110.5 111.6 0.9%
= Diluted EPS Attributable to AOL ($14.42) $2.35 ($8.89) $1.62 $1.57 $1.42 $1.42 $1.54 (170.4)%
= Diluted EPS from continuous operations ($15.02) $2.24 ($9.01) $1.62 $1.57 $1.42 $1.42 $1.54 (170.2)%

GAAP & Non-GAAP Reconcialition

Income from Continuing Operations ($1,588.8) $237.3 ($961.7) $173.4 $170.2 $154.8 $157.2 $171.5 (170.8)%
+ Stock Comp Expense, net of tax $11.8 $7.5 $22.2 $22.2 $22.2 $22.2 $22.2 $22.2
+ Restructuring Costs, net of tax $22.3 $130.3 $20.7 $0.0 $0.0 $0.0 $0.0 $0.0
+ Goodwill Impairment Charge, net of tax $2,207.0 $0.0 $1,111.7 $0.0 $0.0 $0.0 $0.0 $0.0
+ Gain on Disposal of Assets, Net of tax ($0.2) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
= Net Income (x 1x items) $652.0 $375.1 $192.9 $195.6 $192.4 $177.0 $179.4 $193.7 0.1%
/ Share Outstanding - Diluted 105.8 105.8 106.7 107.2 108.3 109.4 110.5 111.6
= Adjusted EPS - Diluted $6.16 $3.54 $1.81 $1.82 $1.78 $1.62 $1.62 $1.74 (0.8)%
Adjusted EBITDA (Incl. Restructuring) $1,516.4 $856.0 $614.6 $591.6 $516.1 $474.7 $441.4 $414.1

Y/Y % Change
Revenue
Subscription (30.8)% (28.0)% (27.8)% (25.3)% (21.8)% (18.2)% (14.7)% (13.5)%
Advertising (8.3)% (16.9)% (25.8)% (5.2)% (1.3)% (0.9)% 0.3% 1.0%
Other (14.9)% (14.3)% (4.3)% (3.1)% 2.5% 2.5% 5.1% 0.0%
Total Revenue (20.6)% (22.0)% (25.9)% (13.6)% (8.6)% (6.1)% (3.4)% (2.5)%
Cost of Revenue (14.7)% (16.7)% (25.7)% (13.0)% (6.2)% (5.7)% (3.1)% (3.4)%
SG&A (34.2)% (16.5)% (2.0)% (11.4)% (7.8)% (4.3)% (3.7)% (1.1)%
Amortization of Intangible Assets 65.8% (13.3)% 17.0% (34.4)% (50.0)%
Operating Income (Loss) (164.1)% (136.8)% (363.4)% (123.3)% (4.6)% (12.8)% (1.5)% 7.7%
Other Income (Loss), Net (450.0)% (42.9)% (344.1)% 241.8% 35.3% 26.7% 21.5% 16.3%
Income Tax (38.3)% (49.9)% (193.8)% (162.1)% (1.8)% (9.0)% 1.6% 9.1%
Income from Continuing Operations (230.9)% (114.9)% (505.3)% (118.0)% (1.8)% (9.0)% 1.6% 9.1%
Adjusted EPS Diluted 10.2% (42.5)% (49.0)% 0.9% (2.6)% (8.9)% 0.4% 6.9%
Adjusted EBITDA (43.6)% (28.2)% (3.7)% (12.8)% (8.0)% (7.0)% (6.2)%

% of Revenue/Margins
Subscription 46.9% 43.3% 42.2% 36.5% 31.2% 27.1% 24.0% 21.3%
Advertising 49.7% 53.0% 53.1% 58.2% 62.8% 66.3% 68.9% 71.4%
Other 3.4% 3.7% 4.8% 5.3% 6.0% 6.5% 7.1% 7.3%
Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 55.0% 58.8% 58.9% 59.4% 60.9% 61.1% 61.4% 60.8%
Gross Margin 45.0% 41.2% 41.1% 40.6% 39.1% 38.9% 38.6% 39.2%
SG&A 15.4% 14.7% 21.8% 22.4% 22.6% 23.0% 23.0% 23.3%
Restructuring Costs 0.4% 5.9% 1.5% 0.0% 0.0% 0.0% 0.0% 0.0%
Amortization of Intangible Assets 3.9% 4.3% 6.8% 5.2% 2.8% 3.1% 2.7% 1.6%
Operating Margin (28.9)% 13.7% (48.5)% 13.1% 13.7% 12.7% 12.9% 14.3%
Other Income (Loss), Net (0.1)% (0.1)% 0.2% 1.0% 1.4% 1.9% 2.4% 2.9%
Income Tax 9.6% 6.2% (7.8)% 5.6% 6.0% 5.9% 6.2% 6.9%
Income from Continuing Operations (38.6)% 7.4% (40.5)% 8.4% 9.1% 8.8% 9.2% 10.3%

Tax Rate (33.2)% 45.5% 16.2% 40.0% 40.0% 40.0% 40.0% 40.0%

Source: Company data, Evercore Group L.L.C. Research

12
October 15, 2010

Financials
Figure 17: AOL Balance Sheet, 2007-2015E
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
Assets
Current Assets:
Cash $151.9 $134.7 $147.0 $865.1 $1,168.3 $1,459.6 $1,779.7 $2,087.3 $2,368.2
Accounts Receivable 583.6 500.2 462.4 378.3 347.4 336.4 333.6 330.7 330.7
Receivables from Time Warner 90.3 39.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Prepaid Expenses and Other Current Assets 190.7 33.5 33.3 26.3 22.5 21.0 19.9 19.4 19.2
Deferred Income Taxes 269.4 25.8 44.7 33.1 28.6 26.2 24.6 23.7 23.1
Assets Held for Sale 0.0 6.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Current Assets $1,285.9 $740.4 $687.4 $1,302.8 $1,566.8 $1,843.1 $2,157.7 $2,461.2 $2,741.2
Property and Equipement, Net 906.5 790.6 704.8 615.4 504.8 393.4 288.1 203.1 143.4
Long-Term Receivables from Time Warner 55.3 37.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill 3,527.4 2,161.5 2,184.2 829.8 874.8 897.3 908.6 914.2 917.0
Intangible Assets, Net 395.7 369.2 224.7 83.4 (7.4) (52.8) (104.5) (149.1) (174.6)
Long-Term Deferred Income Taxes 634.3 734.2 136.8 184.6 180.0 183.3 172.2 166.3 162.1
Other Assets 58.0 27.7 25.2 24.6 26.4 28.8 31.5 34.7 37.9
Total Assets $6,863.1 $4,861.3 $3,963.1 $3,040.6 $3,145.4 $3,293.2 $3,453.5 $3,630.2 $3,827.2

Liabilities and Stockholders' Equity

Current Liabilities:
Accounts Payable $86.4 $52.2 $100.5 $88.1 $78.9 $76.9 $76.0 $77.6 $79.8
Accrued Compensation and Benefits 198.7 51.1 91.4 59.5 47.2 40.6 35.2 31.3 27.8
Accrued Expenses and Other Current Liabilities 433.7 302.4 413.6 314.4 261.5 236.7 217.6 206.7 198.0
Deferred Revenue 164.1 140.1 113.5 84.1 72.7 66.4 62.4 60.3 58.8
Payables to Time Warner 212.2 58.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Current Portion of Notes Payable and Cap Lease Obligations 74.3 25.0 32.4 16.3 7.4 0.0 0.0 0.0 0.0
Total Current Liabilities $1,169.4 $629.6 $751.4 $562.4 $467.6 $420.6 $391.3 $375.9 $364.3
Notes Payable and Capital Lease Obligations $24.7 $33.7 $41.5 21.8 10.9 0.0 0.0 0.0 0.0
Long-Term Obligations to Time Warner 327.2 377.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Restructuring Liabilities 16.7 9.0 28.3 28.3 28.3 28.3 28.3 28.3 28.3
Deferred Income Taxes 6.8 11.5 9.3 9.3 9.3 9.3 9.3 9.3 9.3
Other Liabilities 48.8 62.8 69.7 304.2 341.2 376.7 411.6 446.5 483.5
Total Liabilities $1,593.6 $1,123.6 $900.2 $926.0 $857.4 $834.9 $840.5 $860.0 $885.4

Stockholders Equity
Common Stock $0.0 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1
Divisional Equity $5,474.1 4,038.6 0.0 (948.3) (774.9) (604.7) (449.9) (292.6) (121.1)
Additional Paid-In Capital 0.0 3,355.5 3,355.5 3,355.5 3,355.5 3,355.5 3,355.5 3,355.5
Accumulated Other Comprehensive Income (206.9) (302.4) (275.1) (275.1) (275.1) (275.1) (275.1) (275.1) (275.1)
Retained Earnings (206.9) 0.0 (20.4) (20.4) (20.4) (20.4) (20.4) (20.4) (20.4)
Total Stockholders' Equity/Total Divisional Equity $5,267.2 $3,736.2 $3,061.1 $2,112.8 $2,286.2 $2,456.4 $2,611.2 $2,768.5 $2,940.0
Noncontrolling Interest 2.3 1.5 1.8 1.8 1.8 1.8 1.8 1.8 1.8
Total Equity $5,269.5 $3,737.7 $3,062.9 $2,114.6 $2,288.0 $2,458.2 $2,613.0 $2,770.3 $2,941.8
Total Liability and Stockholders' Equity $6,863.1 $4,861.3 $3,963.1 $3,040.6 $3,145.4 $3,293.2 $3,453.5 $3,630.2 $3,827.2

Source: Company data, Evercore Group L.L.C. Research

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October 15, 2010

Financials
Figure 18: AOL Cash Flow, 2007-2015E
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
OPERATING ACTVITIES
Net Income (Loss) $1,395.4 ($1,526.6) $248.5 ($948.3) $173.4 $170.2 $154.8 $157.2 $171.5
Adjustment for Non-Cash and Non-Operating Items
Cumulative Effect of Accounting Change, Net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Depreciation and Amortization 498.6 477.2 406.2 371.4 322.7 259.5 251.0 221.0 176.6
Asset Impairment 16.2 2,240.0 23.1 1,414.4 0.0 0.0 0.0 0.0 0.0
Gain on Disposal of Assets and Consolidated Businesses (682.6) (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Equity-Based Compensation 32.3 19.6 12.5 37.0 37.0 37.0 37.0 37.0 37.0
Amounts related to Litigation 171.4 20.8 27.9 0.0 0.0 0.0 0.0 0.0 0.0
Other Non-Cash Adjustments (6.7) (1.7) 7.7 0.6 (1.8) (2.4) (2.7) (3.2) (3.3)
Deferred Income Taxes 102.2 (49.5) (6.7) (36.2) 9.1 (0.9) 12.7 6.8 4.8
Changes in Operating Assets and Liabilities (510.2) (245.9) 189.0 (81.9) (51.0) (27.1) (25.5) (12.0) (11.4)
Net Cash Provided by Operating Activities $1,016.6 $933.6 $908.2 $757.0 $489.3 $436.2 $427.4 $406.8 $375.3

INVESTING ACTIVITIES
Investments and Acquisitions, Net ($881.4) ($1,035.4) ($18.1) ($100.0) ($75.0) ($37.5) ($18.8) ($9.4) ($4.7)
Proceeds from Disposal of Assets 1,034.8 126.9 0.0 187.5 0.0 0.0 0.0 0.0 0.0
Capital Expenditures and Product Development Costs (280.2) (172.2) (135.8) (100.6) (91.3) (87.7) (86.4) (87.7) (89.7)
Investment Activities from Discontinued Operations 261.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Investment Proceeds 8.0 8.4 2.1 0.0 0.0 0.0 0.0 0.0 0.0
Net Cash Used in Investment Activities $142.2 ($1,072.3) ($151.8) ($13.1) ($166.3) ($125.2) ($105.2) ($97.0) ($94.4)

FINANCING ACTIVITIES
Debt Repayments ($25.9) ($54.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Principal Payments on Capital Leases (36.1) (25.1) (31.1) (35.8) (19.8) (19.8) (2.1) (2.1) 0.0
Excess Tax Benefit on Stock Options 34.4 2.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Contribution from (Distribution to) Time Warner (1,390.3) 210.4 (709.3) 0.0 0.0 0.0 0.0 0.0 0.0
Other (7.4) 1.5 (9.2) 10.0 0.0 0.0 0.0 0.0 0.0
Cash Provided (used) by Financing Activities ($1,425.3) $134.9 ($749.6) ($25.8) ($19.8) ($19.8) ($2.1) ($2.1) $0.0

Increase (Decrease) in Cash ($266.5) ($3.8) $6.8 $718.1 $303.2 $291.3 $320.1 $307.7 $280.9
Effect of Exchange Rates 16.9 (13.4) 5.5 0.0 0.0 0.0 0.0 0.0 0.0
Cash at Beginning of Period 401.5 151.9 134.7 $147.0 $865.1 $1,168.3 $1,459.6 $1,779.7 $2,087.3
Cash at End of Period $151.9 $134.7 $147.0 $865.1 $1,168.3 $1,459.6 $1,779.7 $2,087.3 $2,368.2

Source: Company data, Evercore Group L.L.C. Research

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October 15, 2010

ANALYST CERTIFICATION
The analysts Ken Sena, Anupam K. Palit, CFA primarily responsible for the preparation of this research report attest to the following: (1) that the
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of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.

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Overweight – the stock is expected to outperform the average total return of the analyst’s coverage universe over the next 12 months.
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Coverage Universe Investment Banking Services/Past 12 Mos.

Ratings Count Pct. Count Pct.

Overweight 30 48% 4 13%
Equal-Weight 24 38% 0 0%
Underweight 9 14% 0 0%

For disclosure purposes, in accordance with FINRA requirement, our “Overweight,” “Equal-Weight” and “Underweight” ratings may be viewed as
“Buy,” “Hold” and “Sell,” respectively.
As of September 30, 2010
Issuer-Specific Disclosures & Disclosure Legend (as of October 15, 2010)
Company Disclosures
AOL, Inc. 4
Yahoo! Inc. 4

Research Disclosure Legend

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October 15, 2010

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