Verizon to acquire AOL in $4.4 billion deal

Kim Hjelmgaard | USA TODAY

Show Caption Hide Caption Verizon buys AOL for $4.4 billion Telecoms giant Verizon said Tuesday it will acquire digital conglomerate AOL in a deal valued at approximately $4.4 billion.

Verizon (VZ) announced Tuesday it will acquire digital conglomerate AOL (AOL) for approximately $4.4 billion, a move expected to bolster the telecommunications giant's efforts on mobile platforms and digital advertising.

Verizon will pay $50 a share for AOL, which has shifted its focus in recent quarters to video advertising following a split from Time Warner five years ago. The acquisition values AOL at 17% more than the price the stock closed at on Monday — $42.59.

Tim Armstrong, AOL's chairman and CEO, will stay on to run AOL after the acquisition.

In a statement released Tuesday, Verizon says the deal will shore up its wireless and over-the-top (OTT) video strategies. "This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience," said Lowell McAdam, Verizon chairman and CEO, in a statement.

Shares of AOL surged 17.8% in morning trading, while Verizon shares slipped 1.6%.

The proposed deal earned support from Steve Case, AOL co-founder and the company's former CEO, expressing hope that the acquisition will "ensure brighter future ... for company that first got America online."

AOL owns a number of digital properties including The Huffington Post, TechCrunch and Engadget, but AOL's progress on advertising sparked the acquisition. "This is really about AOL's advertising platform," says Roger Entner, an industry analyst at Recon Analytics. "It's one of the few working video advertising platforms out there. Verizon bought it for a relatively cheap price."

When asked about the Huffington Post unit, Armstrong says this deal will give that unit bigger scale and more resources. However, Entner says AOL content is not "a core part" of this acquisition. "Verizon may even sell it off," he says.

AOL has reportedly been in talks to spin off Huffington Post as part of the Verizon acquisition. According to Re/code, which cites "numerous sources," Huffington Post has been valued at more than $1 billion.

The deal with Verizon is really about "mobile and video" Armstrong told USA TODAY. That is where the future is going, he says, stressing that "the whole world is shifting to video."

"There is a lot of opportunity" with this partnership, he says.

The acquisition of AOL gives Verizon a bump in the fast-growing advertising market, where AOL has made strides in recent months through video and programmatic advertising, automated ads using computer algorithms that help target a specific audience. In 2013, AOL acquired video programming service Adap.TV for $405 million.

Dollars spent on programmatic advertising will surge to $14.88 billion this year, according to research firm eMarketer. By next year, it will top $20 billion, representing nearly two-thirds of the display ad market. Digital video ad spending is also on the rise, expected to jump 33% this year to $7.77 billion.

AOL owned 0.74% of the global digital ad market in 2014, says eMarketer, trailing giants Google (31.4%) and Facebook (7.9%). In the U.S. last year, AOL's share was 2.1%.

"With this move, Verizon will become a global media player, extending its reach to hundreds of millions more people than it could in its current business, at a much lower cost than trying to acquire a different network provider," says Forrester analyst James McQuivey.

Armstrong said that Verizon and AOL had already teamed up on some initiatives, but in the last couple of months, the two sides realized "that there was a lot of shared vision."

In terms of past deals, Verizon has been a sponsor of AOL's Makers initiative, which uses short-form video to tell the stories of famous women such as Hillary Rodham Clinton and Oprah Winfrey.

AOL played a leading role in the rise of digital services, most notably through its dial-up Internet access. AOL most recent quarterly results show the company still boasts 2.1 million dial-up subscribers.

However, a massive merger with Time Warner in 2000 — valued at $183 billion — ended in disaster, ultimately resulting in Time Warner completing a spin off of AOL in 2009.

The deal unveiled Tuesday is expected to be finalized this summer. It will need to be approved by regulators.

AOL had been the subject of acquisition talks for months, but by another target: Yahoo. In January, hedge fund Starboard Value pressured Yahoo to scoop up AOL, sending shares of both companies rising.

Contributing: Mike Snider, Roger Yu in McLean, Va., Laura Petrecca in New York.