Verizon Communications Inc. (VZ, Financial) has agreed to buy AOL Inc. (AOL, Financial) for $4.4 billion as it hopes to sell mobile video advertisements in a better way. This acquisition values AOL Inc. at $50 a share which is 23% higher than the company’s three month volume weighted price.
AOL faces derision for its dialup internet business but has collected some useful online video technology tools to buy and sell advertisements automatically in real time. These tools measure audience metrics and specifically target users based on their preferences. These technologies will help Verizon as it wishes to enter the crowded online video advertising market. The competition in U.S. wireless service business has increased over the years. Companies like AT&T Inc. (T) and Sprint Corp. (S) are fighting to steal market share from one another. Verizon has more than 100 million wireless customers, and it plans to launch an ad-supported mobile video service.
AOL includes the Huffington Post, TechCrunch and Engadget websites. These will become Verizon’s subordinate companies and AOL’s CEO Tim Armstrong will stay in his job.
What’s in it for Verizon?
The deal can be viewed as collaboration between technology and marketplace, as AOL has the required technology tools and Verizon provides the mobile platform. AOL’s technology and Verizon’s customer data can be effectively used to target mobile advertising business. Verizon competes with Google (GOOG, Financial) and Facebook Inc. (FB, Financial) in the video ads business for mobile and desktop website publishers. The data possessed by Verizon will also help it target on behalf of those publishers.
AOL bought the advertising network Ad.com in 2004. Ad.com lets advertisers buy targeted ads across mobile devices and web. After that, AOL bought firms like 5min Media, video advertising platform Adap.tv, and Gravity. 5min Media owns the videos that can be placed with the ads across the web and Gravity tracks the users’ interests to target them with advertisements. Thus with AOL, Verizon can solve the problems related to measurement of ad metrics and targeting. As the global revenue from online video ads is expected to hit $19 Billion by 2017 from $11 billion last year, video advertising is seen as Verizon’s top goal with this deal. Verizon will have to assertively buy telecommunication spectrum to create space for increasing mobile video traffic.
The $50 per share offer for AOL in the all-cash deal also represents 17% premium to AOL’s closing price on Monday. AOL shares added 18.4% to $50.41, while Verizon fell 0.4% to $49.63.
AOL affairs
AOL’s dialup internet service once had a large number of subscribers. During the peak of the dot-com boom, AOL used its increased share prices to buy Time Warner Inc. (TWX, Financial) which turned out to be one of the most horrendous mergers. The company’s value decreased rapidly after the dot-com bust. After spinning off Time Warner, AOL shares opened at the New York Stock Exchange in 2009 at $27.
Advertising will be an important revenue generator for Verizon. AOL’s ad platform revenue added 21% to $279.8 million. This was 45% of the total revenue in the first quarter.
Take away
This puts Verizon against tech giants like Facebook Inc. and Google, fighting for its share in mobile video advertising market. Verizon expects to close the deal this summer.
