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Verizon Buys AOL for $4.4 Billion

Six years after leaving Google to try a turnaround, Tim Armstrong finds a buyer. He says he'll stay on after the deal.

Asa Mathat
Peter Kafka covers media and technology, and their intersection, at Vox. Many of his stories can be found in his Kafka on Media newsletter, and he also hosts the Recode Media podcast.

Earlier this year, AOL CEO Tim Armstrong said there was no truth to reports that he was selling his company to Verizon. It’s a different story now: The telco is buying the Internet publisher and subscription service for $4.4 billion.

Verizon, which will pay $50 a share for AOL, says the deal will help its “wireless video and OTT (over-the-top video) strategy.” Verizon says the transaction should close this summer.

Armstrong, who left the top sales job at Google to run AOL in 2009, will stay on to run the business after the deal closes, Verizon says.

If Verizon keeps AOL intact, it will have acquired a business that’s part ad tech operation, part publisher. AOL is best-known for its Web properties like Huffington Post and TechCrunch, but in the past few years it has concentrated on bulking up on services that help it and other publishers automate their ad sales. That business is growing at a much faster pace than AOL’s content business, but has lower margins.

AOL’s earnings report from Q1 spells out the difference quite clearly: Its “Brand” group — which includes HuffPo and TechCrunch — grew its revenue by 8 percent over the past year and posted operating income of $13 million. Meanwhile, its “Platforms” group — which specializes in automated ad sales on other publishers’ properties — grew by 21 percent but lost $10 million.

One scenario we’ve heard is that Verizon intends to spin out some or all of its content operations, like HuffPo, with a third partner, perhaps German publisher Axel Springer.

In an interview with Re/code, Armstrong didn’t address that scenario directly, though he seemed to leave the door open. “We’ve spoken to partners about content and scaling,” he said. “Obviously we’ve seen a lot of interest in the content brands we have. So over the course of the summer, stay tuned.” [UPDATE: AOL is indeed in talks with Axel Springer, as well as other potential investors, to spin out Huffington Post, Kara Swisher reports.]

AOL spokeswoman Caroline Campbell adds that “AOL owns a portfolio of premium, global content brands including The Huffington Post, TechCrunch and Endgadget, among others, and all of them will continue to be part of our business as we go forward.”

In a press release announcing the deal, Verizon CEO Lowell McAdam noted that his company has been “strategically investing in emerging technology, including Verizon Digital Media Services and OTT, that taps into the market shift to digital content and advertising. AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams.”

To spell that out: AOL has spent a lot of time and energy — including its $405 million acquisition of Adap.TV in 2013 — to build its video advertising business. And Verizon plans on unveiling a Web video service this summer. Connecting the two seems like the most likely rationale for the deal.

As John Stratton, head of Verizon’s operations, said at an analyst conference this morning, Verizon’s “principal interest was around the ad tech platform that Tim Armstrong and his team have done a really terrific job building.”

During Verizon’s earnings call last month, CFO Fran Shammo indicated that advertising would play a role in its video plans. “As far as the monetization model, when you think about the monetization, there’s many different avenues we can do on this,” he said. “There could be premium subscriptions. There could be pay-per-views using the multicast technology. There can be advertising models so that the consumer does not pay for the content consumption.”

When Armstrong took over, AOL was still a part of Time Warner, the result of one of the worst mergers in corporate history. A few months into his tenure, Time Warner spun out AOL into a separately traded company, initially valued around $3.4 billion. An AOL spokesperson says that, including a $5.15 dividend that the company distributed in 2012, AOL shareholders saw a return of 147 percent during Armstrong’s tenure.

Here’s an interview Re/code’s Kara Swisher conducted with Armstrong last week at the cable industry’s annual trade show, now called INTX, the Internet and Television Expo, last week.

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