• by Gavin O'Malley  @mp_gavin, September 9, 2011

In the wake of Carol Bartz's ousting, AOL chief executive Tim Armstrong has reportedly reengaged Yahoo about a potential merger.

Armstrong has already held talks with private-equity firms and investment bankers from Allen & Co. that are working with Yahoo, Bloomberg reports, citing sources.

Amid increasing criticism and pressure to right AOL's ship, Armstrong expressed interest in a merger with Yahoo last year, but was spurned by Bartz.

Last month, Armstrong confirmed retaining two big M&A specialists -- investment banker Allen & Co, and law firm Wachtell, Lipton, Rosen & Katz -- but said there were currently no deals on the table, and that AOL's strategy had not changed.

Regarding the merger rumors, neither Yahoo or AOL returned requests for comment on Friday. In a Friday tweet, however, CNBC reported that a source close to Yahoo said the company had no interest in a merger.

Whether a merger would improve either company's prospects is far from certain. For one thing, AOL's market value -- at about $1.6 billion -- is currently lower than Yahoo's $18.2 billion.

Moreover, traffic to AOL sites rose just 3% in June, according to comScore, with only modest increases to its newer properties, including the Huffington Post -- which set AOL back $315 million -- and local Patch sites.

Regarding Patch -- arguably Armstrong's biggest long-term gamble -- AOL is presently spending about $160 million a year on the local media network, which equates to about $150,000 to run each individual Patch site annually, according to analysts.

Putting added pressure on Armstrong, home page display ad trends at AOL remained "sluggish" through the first half of the third quarter, according to a new report from Macquarie Securities.

Worse still, AOL fell behind Yahoo in terms of its proportion of higher-priced oversized/custom ad units -- 17% versus 25%. "This was a meaningful decline from 24% for [the second quarter of the year] and 26% in [the first quarter], when AOL led all portals in terms of oversized/custom home page ad units," according to Macquarie analyst Ben Schachter.

Earlier in the year, Macquarie expressed confidence that AOL's Project Devil ad initiative would help it gain momentum going forward, but that does not seem to have happened.

"Project Devil units still haven't shown much on the home page and obviously are not having the expected traction," according to Schachter.

In what was likely a symbolic gesture, Armstrong invested roughly $10 million in 477,000 shares of AOL stock earlier this year. He nearly doubled his stake in the company to 4% after the stock dropped on news of AOL's $315 million acquisition of online news and opinion site Huffington Post.

Then, last month, AOL approved a stock repurchase program that authorized the company to repurchase up to $250 million of its outstanding shares of common stock over the next 12 months.