The upside of shutting down Bebo for AOL

(Credit: Reuters)

It might seem obvious to most observers that AOL would want to cut its losses and get out of Bebo sooner rather than later, especially after it confirmed yesterday it was evaluating strategic options for the struggling business (ie shutting it down or selling it).

AOL CEO Tim Armstrong (pictured, left) has been pretty indifferent about the fading social network’s prospects ever since he came on board last year — though he did initially promise to hold on to it.

But Credit Suisse analyst John Blackledge points out in a client note that Bebo’s burdensome $850 million price tag at the time it was bought might serve some beneficial purpose for AOL after all:

Any sale would likely generate (far) less than the $850 million acquisition price, creating a tax loss, which could be used in the future against any capital gains (if AOL were to have any).

The other (and best) option for AOL would be to close Bebo, effectively deeming the asset as worthless and taking a loss deduction.

The second option would let AOL write off that $850 million and create a future tax benefit through a net operating loss (NOL) asset, Blackledge explains. He does, however, add the caveat that it’s not clear if the IRS would allow AOL to treat Bebo as an abandoned asset but it is exploring that option.

If Blackledge’s analysis is right, then perhaps the surprising thing is that AOL, which was spun off from Time Warner late last year, still has Bebo on its books at a $850 million valuation. One can only speculate this may be why Time Warner’s management never explicitly said it was writing down Bebo’s value when it took a $25 billion writedown charge in the first quarter of 2009 — it was looking out for the soon-to-be independent AOL.

Purely from a financial point of view, as AOL makes the tricky transition from dial-up subscription cash flows to volatile Web advertising revenue having a sizable NOL in its back pocket would be no bad thing.