Big news today: Verizon is acquiring AOL for $4.4 billion in cash, or $50 per share (on Monday, AOL was $42.59, which means Verizon paid a 17% premium). This deal came right after Goldman Sachs placed a “Sell” rating and $38 price target on AOL, which is basically a hint for its clients to sell the stock (although one could argue that getting AOL for $4.4 billion is a steal given that AOL generated $2.5 billion in revenues last year alone).
Now, the “business” side of the deal makes sense. AOL, under CEO Tim Armstrong, has been steadily building out its ad tech stack. Armstrong wants AOL to become one of the top three biggest players in the realm of online advertising, next to Facebook and Google. It is currently at number 11, and one of the easiest ways it can get to number three is if it uses Verizon’s scale to do that. In exchange, AOL offers Verizon a ready-made ad tech platform that shows a lot of promise. It’s a logical symbiotic relationship.
But for $4.4 billion, Verizon will also get AOL’s media properties (the biggest being TechCrunch, Engadget and the Huffington Post). That’s a lot of baggage Verizon is not going to want, especially since Verizon most likely only wanted AOL for its ad tech stack and a shot at getting AOL’s 2.1 million dial-up subscribers.
Ad tech stack refers to the ability for marketers to buy and sell ads using an algorithm, rather than human-to-human interaction. Here’s Bloomberg describing why it’s important: “Automated ad buying is an essential tool for companies such as Verizon as they increasingly offer content over mobile phones and the Internet. Digital marketers are demanding a streamlined buying and selling process — leaving those without a programmatic platform at risk of losing those ad dollars.”
So, what’s going to happen to those media properties?
(AOL spent a lot of money acquiring these properties. In 2011, the company spent $315 to acquire the Huffington Post.)
The easiest thing to do for AOL would be to absorb these media properties and let them run independently. But that would be a bad idea for Verizon: AOL’s media properties aren’t only not profitable, they’re often operated at a loss too (AOL had more revenue from subscription products in 2014 ($606.5 million) than from display ads ($593.1 million).
Ideologically, owing these media properties would not advance Verizon’s agenda either: the company has tried to own the media narrative before with its own site SugarString, and failed spectacularly in doing so after banning its reporters from writing about certain subjects that made Verizon uncomfortable (NSA, privacy, etc.).
The only logical thing to do is for Verizon to spin out AOL’s media properties.
There are two ways this can happen.
One of the ways Verizon can do so if it spins out the media properties with a third partner (other than AOL and Verizon), such as German publisher Axel Springer, as Re/Code’s Peter Kafka reports.
But there is a more exciting (and possibly profitable!) alternative: Yahoo could buy up AOL’s media properties.
Yahoo, under CEO Marissa Mayer, has developed further and deeper into the content business than her predecessors in an effort to cover its falling search market share across the world.
Today, Yahoo’s editorial team includes star reporters such as David Pogue and Katie Couric (word is on the street that Yahoo is actively pursuing Bill Simmons after his breakup with ESPN late last week).
It has created digital “magazines” for its politics, fashion and tech verticals, among others.
It’s clear: Yahoo is serious about its content business. And if it wants to go all out on the content business, the easiest way to do so would be to absorb AOL media properties’ talented writers and editors, along with the sites’ established brand names.
Doing so would also make it easier for Yahoo to penetrate the content industry of other matured markets, such as China, Korea, and the U.K., where sites like the Huffington Post have already established a strong presence (the Huffington Post generates 1.1 billion views across 9 different markets each year).
If Verizon decides to spin out AOL’s media properties, it could also provide a nice exit for Armstrong, who currently owns 1.9% (~$7.4 million) of AOL (not taking into account the hidden clauses/sweeteners usually thrown into contracts like this one).
Overall, the market seems pretty happy with the deal: AOL shares surged 18% (~$50.26) after the deal was announced.
UPDATE: Verizon is indeed looking to spin off its flagship Huffington Post content unit, reports Re/Code’s Kara Swisher…
Quick summary of what Swisher reported:
- AOL had been planning to spin off the Huffington Post while negotiating its deal to sell to Verizon.
- “… talks have been most serious with Axel Springer, the German media conglomerate, but a number of private equity firms have also expressed interest…”
- Price: $1 billion (this is more than three times what AOL paid for the Huffington Post a few years ago)
- Will either be a complete sale, or more likely, structured as a joint venture.
- “AOL’s other content properties are not part of these talks.”