Marissa Mayer Could Buy AOL Tomorrow If She Wanted To - A Deal Tim Armstrong Has Wanted In The Past

After Alibaba's initial public offering today, Yahoo will have about $5.29 billion in cash to play with.

The big question is: What will Yahoo CEO Marissa Mayer do with the money?

She could probably buy AOL if she wanted to.

Back in June 2012, Yahoo's interim CEO Ross Levinsohn and AOL CEO Tim Armstrong talked multiple times about such a deal. (I learned this working on my book, "Marissa Mayer and the Fight to Save Yahoo!")

Back then, AOL's market cap was around $1.5 billion. People on Yahoo's side of the talks felt like Armstrong would have sold for $2 billion.

Today, AOL's market cap is $3.3 billion. Between Yahoo's cash and stock - and the 400 million shares of Alibaba that Yahoo still owns - Yahoo could certainly come up with an offer to match the premium Armstrong wanted two years ago.

Owning AOL would certainly help Yahoo. Two reasons:

• The companies are basically in the same business, and could eliminate a lot of costs upon their combination.
• Unlike Yahoo, AOL is actually growing is revenues thanks to its Ad.com ad network and its video ad platform Adap.tv. The deal would be a rare accretive tech acquisition.

AOL would not be a very exciting purchase for Yahoo. It's an old company in an old business. Also, AOL isn't exactly a Wall Street darling. Investors don't expect much from it going forward, and they value AOL at 1.41X its trailing twelve months of sales.

Believe it or not, that's a better multiple than investors are currently giving Yahoo's core business.

As sensible and as doable as an AOL deal would be, it's unlikely Mayer will pull the trigger on it.

Her vision for Yahoo is of a company that helps consumers do things on their smartphones - share photos, check scores, read the news, message each other. It's more likely she will use the money to buy a company with growing mobile usage than growing revenues. She wants to buy the next Snapchat, and figure out how to monetize it later.

The trouble with that plan is that Facebook and Google also want to buy the next Snapchat. Also, VCs are willing to give those kinds of companies huge valuations and make their founders rich in the process.

Even with its $5 billion, Yahoo doesn't have enough cash to compete with rich VCs and Silicon Valley competitors. Maybe after it finally sells the rest of its Alibaba stock it will.

If Mayer does pull the trigger on AOL, it will be because of AOL's surprisingly large video ad business. During some recent quarters, AOL has actually served more video ads than Google, according to ComScore.

Mayer has tried to buy a company that increases Yahoo stock of video advertising inventory a couple times now.

She was close to buying Daily Motion in 2013. This summer, Yahoo was involved in talks to buy Twitch, the site where people watch other people play videogames.

Other likely targets are Hulu and Vevo.