U.S. wireless behemoth, Verizon Communications Inc. VZ has successfully completed its acquisition of AOL Inc., a major player in the digital content and online advertising space. The company bought all outstanding shares of AOL common stock for $50.00 per share in cash. The deal is valued at around $4.4 billion.
Moreover, Verizon has retained all the online content businesses of AOL. Thus, it now owns AOL’s tech sites, TechCrunch and Engadget, and The Huffington Post. Further, AOL’s Chief Executive Officer Tim Armstrong, who has been associated with the company since 2009, has also retained his position post the takeover.
Rationale Behind AOL Purchase
Over the last few years, Verizon has been focusing on strengthening its Internet TV, mobile video, online advertising and online content delivery business, given that these businesses have the potential to generate significant revenues for the company. In Dec 2013, the company acquired content delivery network operator EdgeCast Networks. In Jan 2014, Verizon took over Intel Corp.'s INTC OnCue service and set-top box business.
The acquisition of AOL will not only expand Verizon’s mobile-video offerings, but also provide access to its state-of-the-art advertising technology which enables automated buying and selling of ads online. Verizon boasts the best in-class fiber-based FiOS video network and at this stage, the takeover of AOL will complement the company’s video distribution network with an in-built mobile content development network.
In Apr 2015, AOL launched a fresh ad platform named One. This platform allows advertisers to bid for online space on social networking sites such as Facebook and Twitter. This platform tracks ads and helps advertisers purchase ad time. Also, in 2014, AOL produced 80 original episodes of video content. The company plans to step up this number to 3,600, going ahead.
Notably, according to market research company eMarketer, the global mobile ad market value is expected to escalate to $68.7 billion in 2015 from $43 billion in 2014. Also, by 2017, the market is likely to provide an opportunity worth $133.7 billion. The AOL buyout should thus reap beneficial results for the company, going ahead.
Our Take
Verizon’s legacy telecom business is facing serious pricing competition from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by cable companies. Moreover, smaller wireless carriers like Sprint Corp. S and T-Mobile US TMUS have initiated a cut-throat pricing war with cost-effective voice and data plans.
In such a scenario, we believe the AOL acquisition will lend Verizon’s business the much-needed new dimension and help drive its top as well as bottom line significantly as well.
Verizon currently has a Zacks Rank #3 (Hold).
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