Why Verizon is buying AOL for $4.4 billion

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Verizon Communications is buying AOL for $4.4 billion to build up its nascent business in video and advertising on mobile phones.

The price is $50 per share, a 17% premium on AOL’s closing price on Monday, May 11. AOL’s stock immediately jumped above $50 in pre-market trading, suggesting investors believe the company could extract a higher price from Verizon. AOL’s stock traded as high as $53 last year.

AOL chief Tim Armstrong, who has led the company since 2009, told employees in a memo that he and other executives will be staying. “We will be a division of Verizon and we will oversee AOL’s current assets plus additional assets from Verizon that are targeted at the mobile and video media space,” Armstrong wrote.

AOL, once the leading provider of dial-up internet service in the United States, has since transformed itself into a media company and invested heavily in technology that automates the sale of online advertising. Its closest competitor in those areas is Yahoo, which may now feel additional pressure to seek its own buyer.

Verizon is the country’s largest wireless provider, with more than 130 million subscribers. But that business is threatened by increased competition and alternative ways to connect to the internet, like Wi-Fi and mesh networks, as well as new services from the likes of Google.

So Verizon has sought to offer its customers media in addition to connectivity. For instance, Verizon Wireless is the exclusive provider of National Football League games on mobile phones. Verizon has also been planning an internet television service, similar to ones recently launched by Dish Network and Sony.

With AOL’s technology, Verizon may be able to generate more revenue from advertising rather than subscriptions. AOL’s media properties, which include the Huffington Post and plenty of video, may also work well as mobile content, though it’s equally likely that they end up in a separate spin-off company. AOL video hasn’t been particularly compelling thus far and faces lots of competition from large media companies and startups alike.

AOL and Verizon both have tortured histories often invoked as warnings against corporate synergy. AOL merged with Time Warner in 2001, at the height of its dial-up business, before they slowly fell apart and divorced in 2009. Verizon is the descendant of the Bell Telephone Company, which was forced by the US government to split into smaller telecommunications providers, one of which eventually merged with GTE to form the current firm in 2000. Even their names suggest a convoluted evolution: AOL no longer stands for America Online, and Verizon is a portmanteau of veritas and horizon.

More coverage of the Verizon-AOL deal

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