Verizon Communications to Buy AOL for $4.4 Billion

What Verizon Gets From AOL: Programmatic Video Ad Tech

Verizon Communications Inc. agreed to buy AOL Inc. in a deal valued at $4.4 billion that intensifies the battle for advertising on mobile devices.

Verizon, the largest U.S. wireless provider, gets two of AOL’s technologies: exclusive video and its ability to automatically send targeted ads to mobile devices. The technology brings Verizon another step closer to the summer start of its mobile streaming service, featuring live TV, original shows and pay-per-view.

As the world embraces mobile with increasing enthusiasm, the deal gives Verizon new revenue streams at a time when its main business faces increasing competition from challengers such as T-Mobile US Inc. It also directly pits the company against two leading Web ad companies, Google Inc. and Facebook Inc.

“They want to integrate advertising and content programming with their wireless network,” Roger Entner, an analyst with Recon Analytics based in Dedham, Massachusetts, said of Verizon. “It’s an ambitious plan. The mobile advertising market is dramatically dominated by Google.”

The carrier is getting its hands on AOL’s ad technology just before the debut of its mobile video-streaming service, which could come as early as next month. Verizon will pay $50 a share, a 17 percent premium over AOL’s stock price on Monday, and AOL Chief Executive Officer Tim Armstrong will continue to lead AOL’s operations after the deal is completed, the companies said Tuesday in a statement.

AOL’s shares jumped 19 percent to $50.52 at 4:22 p.m. in New York, slightly above Verizon’s offer price. Verizon dropped 0.4 percent to $49.62.

Different AOL

AOL today is a much different company now than it was 15 years ago, when the Internet portal famous for intoning “You’ve got mail” at log-in agreed to merge with Time Warner Inc. It was one of the world’s largest deals and became one of the largest failures. Two years later, the value of the combined company had dropped by two-thirds and the merger ended in a spinoff six years ago. The company, under Armstrong, has since bought sites like the Huffington Post and TechCrunch, and expanded its mobile content.

“The deal means 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 said in a memo to employees. “The deal will add scale and it will add a mobile lens to everything we do inside of our content, video and ads strategy.”

Wireless Market

In a saturated U.S. wireless market, Verizon, with more than 100 million monthly wireless subscribers, is battling for customers with smaller and more nimble rivals like T-Mobile. One way to differentiate itself is its planned mobile video-streaming service, which will be one of the increasing number of packages targeting Americans who don’t want to pay for traditional pay-TV bundles. The carrier has been planning a service for as early as June, a person familiar with the talks has said.

Armstrong said the idea of some kind of combination was first broached last summer when Verizon CEO Lowell McAdam met with him at a CEO retreat.

The two executives talked about how they might be able to work together on mobile technology, according to a person familiar with the situation who asked not to be identified because the discussions were private.

AOL had been focusing on a technology known as programmatic advertising, an automated marketplace where ads are found and inserted in a flash. With a growing number of viewers watching videos on mobile devices, AOL had found a way to compete with Google and Facebook.

Advertising Component

Verizon had been working on a streaming-video system and had acquired video-technology companies including upLynk, EdgeCast and OnCue. It was clear, as those pieces came together, that an advertising component was missing, the person said.

McAdam assigned Marni Walden, the former chief operating officer of its wireless business, to lead the development of the mobile video service, which included getting some form of deal with AOL.

Over time, the discussions covered a variety of approaches. Different frameworks were considered, the person said. One was focused on assets, another on a joint venture and a third on acquisition, the person said.

Around January the talks centered on the idea of setting up a separate ad tech company as a joint venture. Eventually those discussions led to talk of a takeover, the person said.

New Revenue

Verizon’s push into mobile video will mark the largest attempt to tap new revenue sources beyond the calling and data services it sells to its wireless subscribers, Entner said.

“Verizon had the early lead in mobile advertising with the right vision and good assets behind it,” Entner said. “Then Google came in and bought AdMob and completely upended the market. With this deal, Verizon is trying to turn back the clock and get control of the mobile value stream.”

Verizon said it plans to fund the deal with cash on hand and commercial paper. The transaction is expected to be completed by the end of the summer, the companies said.

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