AOL Inc. agreed to buy the video-advertising startup Adap.tv for $405 million, marking its biggest acquisition since Chief Executive Officer Tim Armstrong led the spinoff of the company from Time Warner Inc. in 2009.
AOL announced the cash-and-stock deal as it posted second-quarter profit that beat analysts’ estimates, lifted by gains in advertising sales. The stock rose 1.4 percent to $36.69 at the close in New York. The shares have gained 24 percent this year, outpacing the 21 percent gain of the Standard & Poor’s Midcap 400 Index.
The acquisition reflects a different strategy than AOL’s $315 million purchase in 2011 of the Huffington Post, which was part of Armstrong’s effort to transform the once struggling dial-up provider into an advertising-based publisher. Adap.tv, in contrast, will help AOL grab the ad dollars spent on television as Internet video draws more viewers, he said.
“This is about the TV business,” Armstrong said in an interview. Traditional television will increasingly delivered over the Internet, giving companies like AOL a chance to capitalize on the shift, he said.
Adap.tv is a third-party ad technology that matches advertisers and video publishers through an exchange. The San Mateo, California-based company has benefited from the growth of online video as well as software-driven advertising, which the industry calls programmatic buying. Last year, the startup ran over 26,000 ad campaigns across 9,500 websites.
Even as that market grows, startups face challenges in trying to reach the initial public offering stage, potentially coaxing more of them into acquisitions. Adap.tv competitor YuMe Inc. debuted on the New York Stock Exchange today after lowering its offering price.
The rates for video advertising have held up better than for online ads in general, said Amir Ashkenazi, CEO of Adap.tv.
“Video is a very different ecosystem,” he said in an interview. “It’s extremely supply constrained.”
Separately, Armstrong is looking to slim down AOL’s Patch division, which provides hyperlocal news to towns and neighborhoods across the country. Some of AOL’s poorer performing Patch sites may have to be closed or put together with outside partners, Armstrong said. He aims for the division to start turning a profit by the end of the year. The company currently has around 900 Patch sites.
AOL’s profit for the quarter, excluding items such as restructuring costs and equity-based compensation expenses, came to 46 cents a share. That compared with the 43-cent average of predictions compiled by Bloomberg. Advertising revenue, including display, search and network, rose 6.9 percent to $361.2 million. Total sales gained 1.9 percent to $541.3 million, falling short of the $544.5 million average estimate.
Adap.tv’s purchase price includes about $322 million in cash and $83 million in AOL common stock, subject to certain adjustments. The company will operate independently as part of AOL’s video organization, led by Ran Harnevo.