Verizon launches $4.4bn takeover of AOL in ad technology and mobile video push

US telecommunications giant Verizon Communications has launched a $50 per share all-cash offer for AOL as part of a push into content and mobile video.

Mobile and broadband service provider Verizon, 15 months after buying back Vodafone's 45% stake in its wireless arm, said it planned to pay for the deal using some of the $4.9bn cash it had on hand at last results plus corporate debt.

It said the combination with AOL, which owns such digital media titles as the Huffington Post, TechCrunch, Engadget, Makers and AOL.com, would create a "mobile-first" offering to better target the global advertising industry.

The offer price is a 17% premium over AOL's closing price on Monday of $42.59 and a 23% premium over the company’s three-month volume-weighted average price.

Morgan Stanley said the deal was "surprising and looks bad/weird"

Analysts said AOL was cherished for its advanced technology for selling online advertising, especially a programmatic ad platform that sells across a huge third-party network of websites, and its skills with delivering video online.

Morgan Stanley, in a note to institutional traders, said the deal was "surprising and looks bad/weird" but that the cost was only around 2% of Verizon's market cap.

"While it is just a drop in the bucket for VZ and does give them a narrative around content and over-the-top, it is hard to see this being spun positively for what has largely been viewed as the safest/most conservatively run company in wireless," Morgan Stanley's institutional equity team said in a sales commentary note.

AOL, which in 2009 was spun out of Time Warner at a value of around $3.4bn after the disastrous $350bn dotcom-boom merger of 2000, is one of the oldest internet companies and is infamous for its fall from grace and legacy dial-up internet customer base.

But having reinvented itself in the last five years as a content provider, the company will be acquired this summer and will, after a transaction taking the form of a tender offer followed by a merger, become a wholly owned subsidiary of Verizon upon completion.

Verizon's vision for video

"Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform," said Verizon chairman and CEO Lowell McAdam, who has been planning a push into mobile video.

"This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."

AOL's chairman and CEO, Tim Armstrong, a former Google sales executive, will continue to lead AOL operations after closing.

"The visions of Verizon and AOL are shared," Armstrong said, "the companies have existing successful partnerships, and we are excited to work with the team at Verizon to create the next generation of media through mobile and video."

Verizon, which last month reported a disappointing set of quarterly earnings, also added that it continues to expect to return its credit rating to "pre-Vodafone" levels in the 2018-2019 time-frame it had previously guided.

AOL's growing revenues

Last week AOL reported its first quarter 2015 results, showing 7% year-over-year growth in revenues to $625.1m, with net income declining by 25% year-over-year to $7m.

AOL's third-party display ad division constitutes over 42.2% of the company's value

Much of AOL’s revenue growth came from the growth of its programmatic advertising platform across the third-party network, while its search and contextual advertising grew 19% but display ad revenues declined by 4% and its core subscription revenues continued to decline, with revenue down 6%.

According to broker Trefis's estimates, AOL's third-party display ad division constitutes over 42.2% of the company's value.

"The move is the latest and most aggressive incursion by a telco into the digital ad monetization space usually occupied by consumer internet companies, and will place Verizon into more direct competition with internet players such as Facebook, Google, Yahoo and Microsoft", advertising technology publication AdExchanger said on the deal.

OTT video and IoT opportunities

Verizon said the purchase further drives its video strategy and its plans to launch an OTT (over-the-top) video service focused on mobile devices in 2015. OTT video is that which is provided via the internet rather than from one's television provider.

"The agreement will also support and connect to Verizon's IoT (internet of things) platforms, creating a growth platform from wireless to IoT for consumers and businesses."

AOL's Armstrong said in a memo to staff that his reason for agreeing to the deal was partly predicated on creating a "business that would be deeply growth oriented and aimed directly at the platform shift that video and mobile are offering the world – today and 20 years from now".

Last month Verizon's chief financial officer Fran Shammo said the video service will offer a mix of paid, free and ad-supported content and won’t try to replicate traditional TV.

The Wall Street Journal noted that Verizon, which already has relationships with many media providers through its FiOS TV service and has a video deal with the NFL, has so far only indicated that its new video service will feature shorter snippets rather than 30 or 60 minute shows.

Last year Verizon bought Intel’s startup OnCue internet video service for around $200m.

On Monday, Macquarie downgraded Verizon to underperform, saying it thought the company was "losing its mojo" and that management "has made three strategic blunders over the past two years", one of which was the pending sale of FiOS TV to Frontier Communications.

The Aussie bank argued this would leave Verizon overly focused on US wireless and thus overly exposed to price competition and hurting its ability to negotiate with video content providers relative to rivals who have more scale in video, such as Time Warner and Comcast.