With New CEO, Spin Out Ahead For AOL

timjpg1Tim Armstrong, until recently senior VP of sales at Google (s GOOG), will become the new chairman and chief executive of AOL, the troubled division of Time Warner (s TWX), replacing the much un-loved Randy Falco. Sure AOL is big, but so is General Motors (s GMC). So, why is he taking on this mission impossible? To put it simply, Armstrong wants to run a public company. That isn’t likely to happen at Google, where Larry Page, Sergey Brin and Eric Schmidt are firmly entrenched at the top. If he goes to AOL and does a good job of turning the company around, he adds another feather to his cap, and in the process become fabulously wealthy. But how is this going to happen? With AOL being spun out of Time Warner.

Time Warner CEO Jeff Bewkes pretty much said so. “He’ll also be helpful in helping Time Warner determine the optimal structure for AOL,” he noted in a press release. Armstrong was also candid in admitting as much in his interview with Kara Swisher.

One of the things we discussed was making sure we were able to have the best outcome for AOL. That could take the form of a lot of different paths.

I am betting on a spin out like I would bet on yesterday’s cricket game. As you might remember, last year AOL was being shopped around, hoping to merge either with Yahoo (s YHOO) or Microsoft (s MSFT) or both. That didn’t quite happen. So what Time Warner is left with is very wobbly three-legged stool.

AOL has three core businesses: Content (MediaGlow), People Networks (Bebo, AIM, ICQ) and advertising (Platform A). As I pointed out earlier, only the content seems to be thriving for the company. It is also aligned with Time Warner’s core competency. Platform A is being hurt by the overall economy. People Networks business, thanks to the $850 million purchase of Bebo, has the feeling of waking up after a 48-hour pub crawl culminating in a Las Vegas wedding with a psycho.

Those three divisions together cannot be spun out as a separate company. To put it mildly, it would be 10 pounds of horse manure in a 5-pound bag.

What Time Warner is going to do is move AOL’s dial-up business back into AOL. This is still a billion-dollars-a-year business, which would allow the company to get much-needed cash flow.

Since this business has extremely high net margins, it could help paper over all the short comings of AOL, turning a wobbly three-legged stool into a more stable table. At some point in the near future, AOL is going to try and determine what to do with the Bebo/People Networks group. Maybe just get rid of Bebo all together, as has been reported earlier. They will also try and streamline Platform A to focus on what it does best: serve remnant ads on AOL’s own properties.

These hard decisions, some financial engineering and a while lot of layoffs later, Armstrong might actually get his wish — running an independent and publicly traded company.