Verizon Communications Inc. is buying AOL Inc. in a $4.4 billion
deal aimed at advancing the telecom giant's growth ambitions in
mobile video and advertising.
The all-cash deal values AOL at $50 a share, a 23% premium over
the company's three-month volume-weighted average price. AOL shares
rose 18% in premarket trading to $50.27. Verizon shares fell 1.6%
to $49.
The acquisition would give Verizon, which has set its sights on
entering the crowded online video marketplace, access to advanced
technology AOL has developed for selling ads and delivering
high-quality Web video.
The U.S. wireless business has matured in recent years, leaving
carriers like Verizon, AT&T Inc. and Sprint Corp. increasingly
fighting to steal market share from one another. Offering digital
video over wireless connections represents a growth avenue in
coming years for Verizon, which last year brought in $127 billion
in revenue and profit of $12 billion.
Verizon has said it plans to launch a video service focused on
mobile devices this summer. The company has offered few details,
but last month Chief Financial Officer Fran Shammo said the service
will offer a mix of paid, free and ad-supported content and won't
try to replicate traditional TV.
The service will feature shorter snippets rather than 30 or 60
minute shows. It also could include multicast programming--a sort
of broadcast service that uses cellular airwaves--for delivering
live content like sports and concerts, along with on-demand
viewing.
That description has left a lot of room for interpretation, and
some analysts briefed on the service recently by the company said
they came away unimpressed. Verizon, however, like rival AT&T,
believes video will be a primary driver of demand for its wireless
network in the years ahead.
"This will have nothing to do with what you do in your house,"
Mr. Shammo said in an interview on April 22. "Millennials consume
news in ways you can't even see on the TV."
Verizon already has relationships with many media providers due
to its FiOS TV service, which is available in 5.6 million U.S.
households. And it has shown prowess in mobile video already,
including through a partnership with the NFL that allows it to
stream some games over phones.
A year ago, Verizon agreed to pay what people familiar with the
matter said was around $200 million to buy Intel Corp.'s fledgling
OnCue Internet video service --an asset that underpins the telecom
company's upcoming offering.
For AOL, the sale is the latest chapter for a company that has
redefined itself in recent years as a significant player in digital
media and marketing, after originating as a pioneer in the dial-up
Web access business and being involved in one of the most
disastrous corporate mergers ever.
AOL eventually grew to more than 20 million dial-up subscribers
and consummated a $183 billion megamerger with Time Warner Inc. in
2000. The company's value dissipated quickly after the dot-com bust
and ultimately Time Warner spun out AOL in 2009.
Under the leadership of Tim Armstrong, a former Google Inc.
executive who took over as chief executive of AOL in 2009, the
company has invested heavily in ad technology--including an
automated, or "programmatic" platform that allows marketers to bid
for inventory electronically. In 2013 AOL purchased Adap.tv, an
"exchange" that connects buyers and sellers of online video
advertising.
AOL also built a stable of content including online news sites
such as Huffington Post, TechCrunch and Engadget. And it has even
produced original Web series. It recently launched "Connected," a
documentary-style series in which the subjects film themselves.
In 2014, AOL generated revenue of $2.5 billion, about 9% higher
than the previous year, and a profit of $126 million. The company
has been successful in growing the part of its business that helps
other companies sell ads, but lately has struggled to grow ad sales
for its owned-and-operated properties. AOL has cut costs by
shutting down some of its core sites and through layoffs.
In an interview, Mr. Armstrong said that the combination of
Verizon and AOL will "create what I think is the largest mobile and
video business in the United States." Mr. Armstrong said he
believes that AOL will now not only be able to compete with digital
advertising giants Google and Facebook Inc., but will also be able
to play in the rapidly emerging connected TV and mobile media and
advertising sectors. "This gives us a real seat at the table for
the future of media and technology," he said.
The deal is expected to close this summer, pending regulatory
approvals. Mr. Armstrong will continue to lead AOL's operations,
the companies said. Verizon expects to finance the acquisition
through cash on hand and commercial paper.
Write to Mike Shields at mike.shields@wsj.com and Thomas Gryta
at thomas.gryta@wsj.com
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