Verizon to Buy AOL in Push for Digital Content

The AOL Homepage Ahead Of Earnings Figures
Andrew Harrer/Bloomberg via Getty Images

By Jennifer Saba, Devika Krishna Kumar and Abhirup Roy

Verizon Communications (VZ) said Tuesday it will buy AOL (AOL) for $4.4 billion, turning the biggest U.S. wireless carrier into a leading provider of content and video for the Web and mobile phones.

The $50-a-share offer represents a premium of 17.4 percent to AOL's Monday close. AOL and its properties, including the Huffington Post, TechCrunch and Engadget websites, would become a Verizon subsidiary, with AOL Chief Executive Officer Tim Armstrong staying in his role.

Armstrong, who has been trying to build up AOL's expertise in mobile advertising technology, sees mobile representing 80 percent of media consumption in coming years.

"If we are going to lead, we need to lead in mobile," Armstrong said in a memo to employees Tuesday.

%VIRTUAL-pullquote-This acquisition is aimed at enabling Verizon to maximize its revenues from mobile video.%Verizon has over 100 million mobile consumers, content deals with the likes of the National Football League and "a meaningful strategy" in mobile video, Armstrong said.

For Wall Street, the deal is about the technology. "AOL's ad-tech offering has been driving its growth for some time now as the Internet business has faded," Dan Ridsdale, an analyst at Edison Investment Research, wrote in a note to clients. "This acquisition is aimed at enabling Verizon to maximize its revenues from mobile video."

Verizon, which last year bought the assets of OnCue, Intel's (INTC) Internet-based TV platform, has been building a video streaming product as it faces the wide availability of voice and data services.

Verizon's $50-a-share offer represents a premium of 17.4 percent to AOL's Monday close. AOL shares jumped 18.4 percent to $50.41, while Dow Jones industrials component Verizon slipped 0.4 percent to $49.63.

Armstrong told Reuters talks between Verizon and AOL started last year. He met with Verizon CEO Lowell McAdam last July about how to further their partnership.

Armstrong said he has a multiyear commitment to stay with Verizon and run AOL as a separate division but declined to give further details.

'Getting a Hodgepodge'

The proposed acquisition was the latest example of how established telecommunications companies look to make deals to jump-start growth as mobile phone expansion slows. AT&T (T), the second biggest U.S. telecom company, is also betting on video, agreeing to buy No. 1 U.S. satellite TV provider DirecTV (DTV), for $48.5 billion. The deal is pending.

Advertising has become a major revenue stream for AOL, helped by the acquisition of automated advertising platforms such as

Demand for the real-time bidding platform that helps advertisers place video and display ads helped AOL beat sales and profit forecasts in its most recent quarterly report.

For AOL, the deal caps a years-long period of reinvention into one of the most successful advertising technology companies.

Disastrous Tie-Up

At the peak of the dot-com boom, AOL, whose dial-up Internet service once counted tens of millions of subscribers, used its elevated stock price to buy movie, television and publishing conglomerate Time Warner (TWX) in one of the most disastrous corporate mergers in history.

After being spun off from Time Warner in 2009, AOL shares returned to the New York Stock Exchange, opening at $27 in November 2009.

The $50-a-share bid by Verizon values AOL below its high of $53.28 in January 2014. Shares have fallen in three of the last five quarters but have gained as much as 56 percent from last year's low of $32.31, leading some analysts to question whether Verizon was overpaying.

"There's the question of whether there is truly an advantage in owning all of this themselves," said Craig Moffett of media research firm MoffettNathanson. "They are paying a premium to own rather than rent, and they are getting a hodgepodge of ancillary assets that may be as much a distraction as a benefit."

AOL has held talks to spin off Huffington Post as part of the Verizon deal, potentially valuing the news and commentary website at $1 billion, Re/code, the technology news website, reported Tuesday, citing sources.

Verizon was showing signs of desperation as its core wireless business comes under pressure, Macquarie Capital analysts wrote in a note. It will need to buy telecommunications spectrum aggressively to accommodate rising mobile video traffic.

"We feel that Verizon paid a hefty price ... for what we believe to be an unproven programmatic ad-tech platform in the nascent video ad-tech space," they said.

Verizon said it expects the deal, which includes about $300 million in AOL debt, to close this summer.

(Note: AOL is publisher of this website.)