Verizon bets on new era in $4.4bn AOL bid

AOL-Verizon deal AOL, the internet pioneer whose ill-fated $350bn merger with Time Warner marked the height of dotcom hubris, has agreed to sell itself for $4.4bn to Verizon. The move by the largest US telecoms group is a bet on the dawn of a new era in which smartphones replace TVs and PCs as the primary screens for entertainment and advertising.

Verizon's push into mobile video and advertising comes amid a new wave of dealmaking in a media and communications industry transformed by the rise of new digital competitors.

AT&T, its closest rival, has bid $48.5bn for DirecTV; cable groups are circling each other after Comcast's failed bid for Time Warner Cable; and content owners such as Fox have been scouting for deals to boost their scale in a advertising market increasingly dominated by Google and Facebook.

The all-cash deal, which Verizon expects to close by the end of summer, values AOL at $50 a share, a 23 per cent premium over the company's average share price for the past three months. AOL shares rose 18.7 per cent to $50.55 - slightly above the offer price - while Verizon slipped 0.4 per cent to $49.62.

Verizon and AOL said their combination would create a "leader in digital content and advertising" aimed at younger customers who watch videos on their smartphones and tablets.

Verizon will acquire AOL content sites including Huffington Post and TechCrunch as part of the deal, but it said its "principal interest" was AOL's advertising technology platform, which embeds targeted adverts into video content.

After a Re/code report that AOL was in talks to sell Huffington Post to Axel Springer, people familiar with the situation said the German publisher made an unsolicited approach for all of AOL last year. However, the valuation was not considered high enough to bring to AOL's board and was dismissed, they said.

A person close to the situation said the chance of AOL selling Huffington Post, the news and entertainment website founded by Arianna Huffington which it bought four years ago for $315m, was slim unless the offer was "huge".

"We like [AOL's] technology a lot," said John Stratton, a Verizon executive vice-president. "It is a key enabler of our strategy."

Verizon said AOL's technology would help it push advertisements to users of the OnCue "mobile first" online video service it is due to launch this summer. It hopes OnCue will boost growth by bringing in advertising revenues and by increasing the time customers spend consuming data on its 4G LTE wireless network, on which the service will run.

Mr Stratton also praised AOL's content arm and its subscription business, which still generated $607m in revenue last year by selling basic internet services such as email to 2.2m US customers - even at a time when many others offer the same products for free.

AOL and its "you've got mail" slogan became synonymous with the internet in the 1990s, before it completed the biggest and most ill-fated deal of the dotcom boom: the 2000 takeover of Time Warner to create a company briefly worth $350bn.

AOL Time Warner's advertising revenue quickly evaporated and in 2002 the group was forced to take a record writedown of $99bn. Time Warner spun out AOL in 2009, and the original merger is now taught in business schools as one of the worst of all time.

Verizon was formed as Bell Atlantic in 1984, after AT&T was forced to break its telecoms monopoly into seven "baby bells". It has since grown to be the largest US wireless group, outstripping the modern AT&T and connecting almost 110m US smartphones and tablets.

However, most analysts and investors see the US wireless market approaching saturation point, prompting Verizon and others to search for new growth sources.

The AOL purchase is Verizon's biggest investment in the video platform it has been building for years. It hopes to attract millennial customers aged 18-35, many of whom are ditching cable and satellite TV subscriptions to get video content "over the top" from online-only groups such as Netflix.

Tim Armstrong, who left a job as Google's top advertising executive to become AOL chief executive in 2009, will continue to lead the group as a division of Verizon, according to an email he sent to staff on Tuesday morning. "The leadership at AOL is staying and I am staying - enthusiastically, and we made that part of the deal," he said.

Verizon's move surprised some investors after Lowell McAdam, chief executive, scotched suggestions he was in talks with AOL earlier this year. In January he said he would "be much more of a partner with media companies versus acquisitions" and described reports he wanted to buy the group as "not accurate".

If completed, the deal would also eliminate the possibility of AOL merging with Yahoo - another group forged in the early days of the internet - a combination that some shareholders had been pushing.

Additional reporting by Shannon Bond in San Francisco and Arash Massoudi in London

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation