Verizon (NYSE:VZ) and AOL (NYSE:AOL) together announced an agreement on Tuesday for the former to acquire the latter for $50 per share, a premium of about 17% over the prior close. The transaction has an Enterprise Value of $4.4 billion, including $3.9 billion in equity and $451 million of debt. The acquisition will give Verizon access to both AOL’s programmatic ad platform and its premier content, especially Videos from Huffington post. Verizon said last month that it was planning to launch a video service over the summer targeting mobile devices. The deal is expected to close this summer as the acquired company is integrated as an independent subsidiary with Tim Armstrong, AOL chairman and CEO, continuing as executive manage of the business.
What Does This Mean For AOL Shareholders?
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AOL has been selectively selling its non-profitable products so that it can focus on improving its ad tech platform, core content verticals and offer new products for these profitable services. CEO Tim Armstrong assumed leadership over the company in 2009 and it took him nearly three years to achieve growth for various performance metrics. According to Tim Armstrong, the company adopted a barbell sales strategy that offers programmatic advertising on one end and deep marketing services or premium buys on the other. This acquisition gives credence to company’s turnaround strategy.
The company posted credible growth for its Advertising business in 2013 and 2014. As a result, it has consistently outperformed the S&P 500 over the past three years. While AOL stock rose by 188%, S&P’s return is close to 68% (as on Monday close). The recent surge in the AOL stock price, after the acquisition announcement, has yielded a return of over 235% for AOL shareholders.
Going ahead, we believe that the company will continue to focus on delivering quality content through its popular websites such as Huffington Post, Tech Crunch and Engadget. Additionally, it will continue to build its programmatic ad platform. However, acquisition by Verizon will give it the necessary clout to pursue its strategy, especially to deliver more ads on mobile, as Verizon has over 33% share in the U.S. mobile market.
Verizon hopes to benefit from AOL’s technical prowess in the programmatic ads space and deliver a premium digital experience to its subscriber base based on AOL’s global multi-screen network platform. We continue to monitor this transaction as it nears completion, and will update our analysis. We currently have a $42.68 price estimate for AOL, which is approximately 18% below the current market price.