Verizon Communications Inc (VZ.N) is buying AOL Inc AOL.N in a $4.4 billion bet that a push into mobile video and targeted advertising can help the biggest U.S. telecommunications company find new growth avenues.
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 job. The companies announced the deal on Tuesday.
Armstrong, who has been building up AOL's expertise in technology for placing text and video ads on mobile phones, 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 on Tuesday.
Global revenue from online video ads is forecast reaching $19 billion by 2017 from about $11 billion last year, cutting into television ad revenue, according to research firm IHS.
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.
It will need to buy telecommunications spectrum aggressively to accommodate rising mobile video traffic.
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, said 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.O) Internet-based TV platform, has been building a video streaming product to expand beyond slow-growth wireless services.
Verizon's $50-per-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 dipped 0.4 percent to $49.63.
Armstrong told Reuters that 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 Inc (T.N), the second biggest U.S. telecom company, is also betting on video, agreeing to buy No. 1 U.S. satellite TV provider DirecTV DTV.O, 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 Adap.tv. 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 quarter.
For AOL, the deal caps a years-long period of reinvention into an advertising technology company.
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 conglomerate Time Warner Inc (TWX.N) in one of the most disastrous corporate mergers in history.
Spun off from Time Warner in 2009, AOL shares returned to the New York Stock Exchange, opening at $27 in November 2009.
The Verizon bid values AOL below its January 2014 high of $53.28. Shares have fallen in three of the last five quarters but are well above 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 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, technology news site Re/code reported Tuesday, citing sources.
Verizon viewed Huffington Post and the media brands as an attractive part of the AOL deal and has no immediate plans to sell them or spin them off, a source familiar with the matter said.
Verizon was showing signs of desperation as its core wireless business comes under pressure, Macquarie Capital analysts wrote in a note.
"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.
LionTree Advisors, Weil Gotshal & Manges and Guggenheim Partners advised Verizon. AOL's advisers were Allen & Co Llc and Wachtell Lipton Rosen & Katz.
(Reporting by Devika Krishna Kumar and Abhirup Roy in Bengaluru, Jennifer Saba and Rodrigo Campos in New York; Writing by Nick Zieminski; Editing by Jeffrey Benkoe and Christian Plumb)