On May 12, 2015, Verizon Communications Inc. (NYSE/VZ) announced that it would buy AOL Inc. (NYSE/AOL) for $4.4 billion. The acquisition would give Verizon more advertising technology and access to the online video streaming business.
Verizon Communications is an American broadband and telecommunications company. AOL is a New York City-based mass media company that develops and invests in brands and web sites.
How Verizon Will Use $4.4 Billion
Verizon plans to fund the deal with cash on hand and commercial paper. The carrier agrees to pay $50.00 a share, which translates into a 17% premium over AOL’s closing stock price on Monday. The announcement also says that AOL’s CEO Tim Armstrong will remain in his leadership position after the deal. (Source: Bloomberg, May 12, 2015.)
In response to the news, AOL shares jumped 18% to $50.27 in premarket trading. The stock price for Verizon, on the other hand, slipped 1.6% to $49.00.
AOL: Automated Advertising and Web Videos
In recent years, AOL has made significant investments in advertising technology. It has a system that allows publishers to sell ad space on web sites and videos using software. The automated buying and selling of advertising is termed “programmatic advertising,” and is expected to grow to $32.0 billion in sales by 2017.
AOL also has a number of online content brands. These include Huffington Post, TechCrunch, Engadget, MAKERS, and AOL.com. Some of these brands, like Huffington Post and TechCrunch, also publish a lot of videos.
Other than a wireless carrier, Verizon also provides traditional cable TV service and broadband Internet service. After acquiring AOL, Verizon can not just benefit from the automated advertising system, but also gain resources to move into online video streaming.
Online video streaming has become a lot more popular over the past decade. Companies like Netflix, Inc. (NASDAQ/NFLX) and Hulu are enjoying enormous growth in subscriptions. Instead of sitting in front of the television waiting for their favorite show to air, people prefer to watch video on their tablets and laptops with the convenience of their own preferred time and space.
Other than tablets and laptops, people are also starting to watch videos on mobile phones. This is a lucrative trend for cell phone carriers.
Verizon is not the only carrier that is thinking of getting some online content. AT&T, Inc. (NYSE/T) has agreed to buy DIRECTV (NASDAQ/DTV) for $49.0 billion.
Buying AOL is a great move for Verizon. To me, it will not be surprising to see similar deals flow through more often now. Consumer behavior with regard to how shows are being watched is changing; and carriers will respond accordingly.