Verizon has put forward an all-cash bid of $4.4 billion for AOL. The offer values AOL at $50 per share, a 23 per cent premium over the company’s average share price over the last three months.
The American broadband and telecommunication company is looking to take advantage of AOL’s advertising technology platform, ONE, in order to help grow its “mobile first” online video service, expected to launch this summer. Verizon is acting upon the change in video entertainment away from TVs and PCs and towards smartphones and tablets, looking to appeal to younger consumers, who prefer to watch videos “on demand”. The advertising technology platform uses data in its algorithms in order to facilitate the buying and selling of ads.
Verizon is looking forward to reaping the benefits of advertising revenues from its mobile video service; in addition to the increase in 4G data consumption on its wireless network, due to more time spent on video ads. AOL still has a long way to go, currently not even owning 1 per cent of the global market share in digital advertising, with giants Facebook and Google owning 9 per cent and 31 per cent, respectively.
The wireless giant’s move remains a surprise, since AOL’s valuation does not only include its advertising branch, mainly aimed at helping third party companies sell their advertisements across the Internet. Verizon’s CEO himself declared in January that a partnership would be more suitable than a merger in this situation. A quarter of AOL’s revenues are generated by the AOL’s old-school dial-up service, which serves Americans where broadband has not yet reached, or those who have in fact forgot to unsubscribe, even though they have already switched to broadband. The number of subscribers is, however, declining year by year, from 26 million in 2002, to only 2.2 million in 2014. Parts of the deal are also the two web platforms that AOL currently owns: Huffington Post and TechCrunch, which are seen by some as non-strategic assets for Verizon and which should be sold. Verizon’s desire to be seen as a progressive, technology-embracing firm might not necessarily be promoted through this deal, with AOL, despite its more recent efforts, still stuck in an image of “the past” in terms of what media and the Internet should look like.
AOL’s reputation, arising from its history, might also not seem worth the price. AOL has made many mistakes in the past, especially when using its overvalued stock to buy media giant Time Warner, for no less than $160bn, 40 times more than what AOL itself is worth in 2015. The 2000 AOL-Time Warner deal, which eventually broke in 2009, is known all around the world as an example of what to avoid. The cultural clash, together with a misreading of the dot-com bubble formed a recipe for disaster. The deals look worryingly similar, since they represent a distributor’s ambition to enter the content business. AOL, once the major Internet provider is nowadays focused on news and advertisement content, entering a similar deal, but from the opposite side of the table. However, others have also spread the trend of distribution-content merge, with the largest broadband and cable company in the world, Comcast, acquiring NBC Universal in 2013. However, in terms of culture clash, the odds are in favour of the AOL-Verizon deal. Despite Verizon being more traditional, the size of AOL is minuscule compared to Verizon, which means that it will be easier for AOL to adapt.
Tim Armstrong, who has been at AOL since the company’s big shift in 2009 and who has been praised for his advertising technology capabilities, will be kept in charge of the AOL subsidiary inside Verizon. Despite being respected by many for being able to bring the company back on track, not everyone supports the somehow “controlling” AOL CEO, who has fired an employee “on the spot” in 2013 in front of 1000 others for daring to take a photograph in a meeting despite being told he was not allowed to. In spite of criticism surrounding his popularity, he has managed to redevelop a strategy for AOL, making it attractive enough for a company such as Verizon to be interested in making a bid. If everything goes according to plan, the deal should be closed this summer.
The lawyers from Weil, Gotshal & Manges are advising Verizon, while those from Wachtell, Lipton, Rosen & Katz are acting on behalf of AOL. The business advisors for Verizon are the boutique firm LionTree, together with the global Guggenheim Partners, while another New York boutique firm, Allen & Co. advises AOL.