According to Bloomberg and its ubiquitous "people familiar with the matter," AOL might be jonesing for a merger with boss-less 'net titan Yahoo .

The two companies already share an advisor firm in Allen & Co, making for some very direct communications—and easy access to nearly-insider views of both companies. And some of the intangibles sure match up:

• Yahoo wants a new leader and AOL CEO Tim Armstrong is a proven talent with an impeccable background at Google.
• Armstrong would probably love a chance to lead a much larger Internet business than the floundering AOL, and Yahoo still qualifies for that description.
• A reverse takeover would be easy enough to pull off as AOL's $1.2 billion enterprise value is easily covered by Yahoo's $2.5 billion in nearly debt-free cash. Moreover, corporate loans have rarely been as easy and inexpensive as they are right now in case Yahoo needed more cash to pump up the bid.

But both AOL and Yahoo are limping badly in their respective content and portal pursuits. Could two wrongs make a right? Would Yahoo find any value in AOL or vice versa?

Money matters

Perhaps the most important question for Yahoo is, will AOL help us make money today? To any potential buyer's relief, AOL happens to be profitable. Over the last four reported quarters, the company pulled in $2.2 billion in total sales, $230 million of net income, and $280 million in free cash flows. That's actually a pretty efficient business.

While nowhere near the 20 percent to 30 percent cash flow margins of cash machines Google and Apple, AOL's cash flow creation holds its own against Yahoo itself. Increase incoming sales and you'll get more cash. At a $3 billion buyout price—to account for that all-important buyout premium—AOL would earn its keep in about a decade. Less, if the business combination creates synergies to increase the cash streams even further.

Of course, we're assuming that AOL wouldn't be able to grow sales or profits on its own, nor shrink it. Unfortunately, AOL is having trouble keeping people interested in what it has to offer.

In 2006, AOL collected nearly $7.8 billion of total revenue, all under the wing of Time Warner. Since then, sales have dwindled by at least 20 percent every year despite increasing traffic: in 2006, Nielsen//NetRatings ranked AOL as the fifth-largest eyeball magnet in the world with 75.3 million unique visitors per month but the latest Nielsen report sinks AOL to number 10 with 100.6 million monthly users.

AOL is trying pretty darned hard to become a leading content publisher, spending hundreds of millions of dollars on big-name media centers like Huffington Post, Engadget, Joystiq, and TechCrunch. Yet the average time spent on AOL sites is just over two hours a month, ahead of Yahoo, but behind Google and Microsoft, among others. The new leader in sticky pages is Facebook, which has stolen AOL's old six-hour mark.

Sticky pages mean more advertising revenue, and AOL just can't keep us interested. And Yahoo doesn't have a solution to that problem, because its monthly engagement time has also dwindled from 3:28 in 2006 to just 1:43 today.

The mirage and the real world

So a merged Yahoo plus AOL would need to reverse the biggest thing the two have in common, which is a slippery hold on formerly very loyal site visitors. In theory, they might stand a chance if Yahoo's portal reach can pair up with exclusive AOL-generated content. Front-page promotion on Yahoo is a very big deal (when Ars content was featured on the front page of yahoo.com, we were on the receiving end of an amazing amount of traffic), and the company could put HuffPo or Joystiq content in front of millions of readers who never heard of either site before. For now, most of that prime real estate goes to The Associated Press, which hardly has any trouble finding distribution channels anyway.

Exclusive, high-quality content provided by AOL plus the biggest shotgun in the media distribution business should equal renewed growth for the two-headed beast. Going back to the old assumptions well, we're obviously banking on Tim Armstrong knowing exactly what to do and having the full support of Yahoo's much-maligned board of directors.

It's a big, bold, beautiful dream and it might be fun to see it happen. It's hard to look away from a train wreck in progress. But the world of online portals is becoming increasingly peronalized thanks to the social networking craze, so Armstrong would need to figure out how to steal both user attention and prime-time advertising deals back from Facebook, Twitter, Groupon, and their ilk. Big traffic numbers ruled the world once, but now you have to make every reader feel special. Our own special sauce here at Ars lies in our storied community, where sprawling discussion forums give you, dear reader, a direct line of communication with us here in the Orbiting HQ. Good luck making a personal connection with Yahoo's or AOL's creative staff.

So trying to fix Yahoo and AOL by bolting them together is a lot like fixing two totaled Chevys by welding them together. The unwieldy new beast might run for a while, but it turns heads only because of the novelty value. That will fade fast, and then you're back to trying to pick up girls in a metal monster sagging under its own weight.

What Yahoo needs is a buyout bid from Facebook. As for AOL, I can't think of a savior. In two or three years, the company will join MySpace on the great Cyberspace scrap heap in the sky.