by David Dixon of FBR Inc (edited by Alan J Weissberger):

Verizon (VZ) announced today that it has entered into agreement to acquire AOL Inc. for $50 per share(17.4% premium to yesterday’s closing price of $42.59) for total transaction price of $4.4 billion. The transaction will take form of a tender offer followed a merger, with AOL becoming a wholly owned subsidiary of Verizon upon completion. The acquisition will be financed through a combination of commercial paper and cash on hand. Management expects the deal to close in summer 2015. (More details on the deal in the WSJ article below)

While we (FBR) do not believe the deal itself is significant, it does show a growing emphasis by VZ to attempt to gain a disproportionate share of millennial viewership which is trending increasingly to over-the-top (OTT) biased and mobile away from linear TV.

Key points:

• VZ expects to leverage its Internet of Things (IoT) platform to deliver AOL content.
• AOL’s primary assets include subscription business, a portfolio of global content brands (Huffington Post, TechCrunch, Engadget, MAKERS, MapQuest, Moviefone, and AOL.com), programmatic advertising platforms, and millennial-focused OTT original video content.
• Content remains king but is shifting from Public Internet to Private Networks.
• As recent industry trend suggests, it is becoming increasingly important for telcos to expand beyond traditional businesses and leverage their differentiated platforms, including mobile and distributed compute platforms (a net new build well underway).
• Architecture shifts toward deeply distributed datacenter nodes leveraging docker technology and Broadcom’s 100Gbps merchant silicon are key.
• Simplifying the metro network allows for a superior class of service platform relative to CDNbased public internet traffic because access networks can now tap directly into the content serverin regional datacenters.
• Taking a page from AT&T and DIRECTV, an AOL acquisition will provide VZ with end-to-end content distribution across VZ’s mobile, video, and broadband platforms.
• Furthermore, it provides VZ with cross selling opportunities including bundling of AOL’s contentwith VZ’s wireless, broadband and TV services.

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WSJ Article: http://www.wsj.com/articles/verizon-to-buy-aol-for-4-4-billion-1431428458

Verizon Communications Inc. agreed to buy AOL Inc. in a $4.4 billion deal aimed at advancing the telecom giant’s growth ambitions in mobile video and advertising.

The all-cash deal values AOL at $50 a share, a 23% premium over the company’s three-month volume-weighted average price. AOL shares rose 18% in morning trading to $50.18. Verizon shares fell 1.7% to $48.98.

The acquisition would give Verizon, which has set its sights on entering the crowded online video marketplace, access to advanced technology AOL has developed for selling ads and delivering high-quality Web video.

“Certainly the subscription business and the content businesses are very noteworthy. For us, the principal interest was around the ad tech platform,” said Verizon’s president of operations, John Stratton, at a Jefferies investor conference early Tuesday.

The U.S. wireless business has matured in recent years, leaving carriers like Verizon,  AT&T Inc. and Sprint Corp. increasingly fighting to steal market share from one another.

Offering digital video-over-wireless connections represents a growth avenue in coming years for Verizon, which last year brought in $127 billion in revenue and profit of $12 billion.

Verizon has said it plans to launch a video service focused on mobile devices this summer. The company has offered few details, but last month Chief Financial Officer Fran Shammo said the service would offer a mix of paid, free and ad-supported content and wouldn’t try to replicate traditional TV.

The service will feature shorter snippets rather than 30 or 60 minute shows. It also could include multicast programming—a sort of broadcast service that uses cellular airwaves—for delivering live content like sports and concerts, along with on-demand viewing.

That description has left a lot of room for interpretation, and some analysts briefed on the service recently by the company said they came away unimpressed. Verizon, however, like rival AT&T, believes video will be a primary driver of demand for its wireless network in the years ahead.

“This will have nothing to do with what you do in your house,” Mr. Shammo said in an interview on April 22. “Millennials consume news in ways you can’t even see on the TV.”

Verizon already has relationships with many media providers because of its FiOS TV service, which is available in 5.6 million U.S. households. And it has shown prowess in mobile video already, including through a partnership with the NFL that allows it to stream some games over phones.

A year ago, Verizon agreed to pay what people familiar with the matter said was around $200 million to buy Intel Corp.’s fledgling OnCue Internet video service—an asset that underpins the telecom company’s upcoming offering.

For AOL, the sale is the latest chapter for a company that has redefined itself in recent years as a significant player in digital media and marketing, after originating as a pioneer in the dial-up Web access business and being involved in one of the most disastrous corporate mergers ever.

AOL eventually grew to more than 20 million dial-up subscribers and consummated a $183 billion megamerger with Time Warner Inc.in 2000. The company’s value dissipated quickly after the dot-com bust and ultimatelyTime Warner spun out AOL in 2009.

Under the leadership of Tim Armstrong, a former Google Inc. executive who took over as chief executive of AOL in 2009, the company has invested heavily in ad technology—including an automated, or “programmatic” platform that allows marketers to bid for inventory electronically. In 2013, AOL purchased Adap.tv, an “exchange” that connects buyers and sellers of online video advertising.  Mr. Armstrong will continue to lead AOL’s operations, the companies said.

AOL also built a stable of content including online news sites such as Huffington Post, TechCrunch and Engadget. And it has even produced original Web series. It recently launched “Connected,” a documentary-style series in which the subjects film themselves.

In an interview, Mr. Armstrong said the combination of Verizon and AOL would “create what I think is the largest mobile and video business in the United States.” Mr. Armstrong said he believed that AOL would now not only be able to compete with digital advertising giants Google and Facebook Inc., but it also will be able to play in the rapidly emerging connected TV and mobile media and advertising sectors.

“This gives us a real seat at the table for the future of media and technology,” he said.

The deal is expected to close this summer, pending regulatory approvals. Verizon expects to finance the acquisition through cash on hand and commercial paper.

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MARKET TALK

Verizon Takes on Heavyweights in Online Ad Sales. So…why AOL? Verizon’s news release runs through an alphabet soup of acronyms–LTE, OTT, IoT (seriously, Internet of things?). None of which sounds very convincing, especially after Wall Street analysts came away from a recent briefing by the company about its video strategy pretty skeptical. One thing is clear, though. AOL has a really good advertising platform. That means VZ will effectively be competing with tech heavyweights like Google, Facebook and Yahoo in the fast-growing online video-ad market. ([email protected])

Verizon Aiming for Younger Eyes with AOL Deal. Everyone’s into video now. AT&T is on the cusp of a $49B deal for DirecTV that will make it the country’s biggest pay-TV distributor. Verizon is taking a different—and cheaper—tack with its $4.4 billion deal for AOL. The diverging strategies of the two telcos seem pretty clear at first glance. Verizon is going after millennials. AT&T has its eye on their parents. ([email protected])

Market Talk is a stream of real-time news and market analysis that is available on Dow Jones Newswires

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Analyst’s Opinions:

 

Verizon’s $4.4 billion acquisition plans for AOL will help the prospective parent company gain additional online advertising tools as well as a stream of fresh and varied content, both of which can help attract more users in the face of growing online advertising competition from Google, Facebook and others.

That’s the take of four industry analysts who shared their insights with eWEEK about Verizon’s May 12 announcement that it is buying AOL to bolster its content and online advertising capabilities.

“Overall, I think it will be a good deal for both companies,” said Charles King, principal analyst of Pund-IT. “My feeling is that the premise everyone is following these days is that mobile technology is going to represent the path of future business opportunities” and that online advertising acquisitions like the Verizon AOL deal can help strengthen such ties.  

“We’re seeing a lot of companies, like the recent Yahoo-Microsoft search deal, as a good example, creating opportunities to allow them to become alternatives to Google,” said King. “Google and Facebook are the two big players here. There are other players who want a piece of that action, and if they don’t move soon, there’s a good chance that they will be frozen out.”

The Verizon AOL deal is a good example of such synergies, he said. “And the relatively modest cost for the deal is indicative that this may not be the only such deal that Verizon does.”  For AOL, “it’s hard to think of a stronger, better parent for AOL to have,” King explained. “Verizon is certainly the 700-pound gorilla of the wireless world.”

For Verizon, the key benefit of the purchase is acquiring AOL’s established online advertising platform, even more than the company’s content, Andrew Frank, an analyst with Gartner, told eWEEK in an email reply.

“I believe this signals a significant shift in the structure of the entertainment and advertising distribution market—it’s clear that digital distribution is the future of all media, and that carriers seek to be more than just ‘dumb pipes’ in this new order of things,” wrote Frank.

A key benefit from the deal for Verizon is that the company “has an opportunity to re-energize its local marketing value proposition, which has flagged with the decline of the Yellow Pages business,” by offering a range of advertising services alongside its communication services, wrote Frank. And at the same time, AOL’s video platforms could help Verizon “take a leadership position in providing the next generation of automated, targeted TV and online video advertising services,” while also further leveraging its mobile footprint “to become a significant player in the fast-growing market for mobile advertising and content services,” he explained.

Frank said he also believes that AOL’s ONE ad tech services, which allow marketers to build their ad campaigns one time across all screen sizes and device types, “have at least as much potential value to Verizon as its content business, even though AOL’s market penetration in this area has not been as significant as its competitors,” he wrote. “Verizon has an opportunity to create more separation between AOL’s content and advertising businesses, which could benefit its ad tech offerings, which are substantial, by removing any appearance of being too close to its publishing business.”

One thing that could interfere with the deal, he said, is if government regulators see the proposed acquisition “as a call for more rules or reforms around the role distributors can play, especially when it comes to data and privacy.”

Patrick Moorhead, principal analyst of Moor Insights & Strategy, told eWEEK he sees the merger “reflecting the challenges that carriers are having in differentiating themselves through their ‘pipes,'” which are becoming more and more a commodity rather than unique delivery mechanisms to their customers. That means that “carriers need something else to provide stickiness” so that their customers and prospective customers keep coming back to them online, he said. “The benefits to this could be that it gives customers more reasons to stick with Verizon, which could result in improved margins.” 

On the other hand, said Moorhead, “I’m a bit skeptical right now, given the kind of content AOL has. They have assembled some interesting Web news content, but outside of that, I’m not seeing popular, exclusive movie, TV show or music content.” 

In addition, the AOL brand today “is nowhere even near as relevant as they were in 1995,” when it was a huge online player, he said. “AOL [back then] was a bit like Google and Facebook are today.” 

Another analyst, Rob Enderle, principal of Enderle Group, is more skeptical of Verizon’s move and isn’t so sure that the carrier will get as much out of the deal as the company thinks it will.

“With Google entering the carrier space as a [mobile virtual network operator] and T-Mobile  getting ever more aggressive in their moves to take [market] share, Verizon is looking for an edge and thinks content is that edge,” said Enderle. But to make it all work, “they need a critical mass of content and AOL alone won’t get them there, suggesting other acquisitions in the future or that this will fail.”

At the same time, if Verizon uses the AOL content providers to heavily promote Verizon, “these publications run the risk of becoming annoying, or worse, untrusted and will lose whatever value they started with,” said Enderle. “I think this showcases that Verizon is scared to death of what Google and T-Mobile are doing but really have no good idea what to do about it so they are rolling the dice and hoping content can change the battlefield.”

AOL Fits Verizon’s Over-the-Top Content Streaming Future

John Stratton, president of operations for Verizon Communications Inc., spoke at a Jefferies global investment banking conference in Miami on May 12, shortly after the deal was announced and said that the merger with AOL “is a very beautiful complement to the foundation that we’ve been building for several years in digital media services,” according to a transcript of the event.

One area where the merger will show promise is in Verizon’s transition to over-the-top delivery of curated video services to users over existing channels, said Stratton. “For us, the principal interest was around the ad tech platform that [AOL chairman and CEO] Tim Armstrong and his team has done a really terrific job building. We really like the technology a lot and we think of it as a key enabler for us as we begin to generate revenue and value above the network layer. So we’ve talked a lot about our over-the-top video ambitions and this is for us a very important cornerstone enabler as part of that broader strategy,” he said.

For AOL, which merged in 2001 with cable company Time Warner, the latest Verizon acquisition proposal has similar risks to the earlier merger, which was slated at the time to reinvigorate both AOL and Time Warner, but left both sides wanting, said Enderle. “The Time Warner merger comes to mind here in that it failed because the cultures of the two entities were just too different,” he said. “Verizon is more like Time Warner than it is like AOL, suggesting that problem will recur.”

The Verizon AOL deal, which had been rumored earlier this year, will bring together the largest U.S. mobile carrier and the AOL video and print content network, including the AOL Huffington Post Media Group.

“Verizon’s vision is to provide customers with a premium digital experience based on a global multi-screen network platform,” Lowell McAdam, Verizon’s chairman and CEO, said in a May 12 statement. “This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience.”

The deal allows Verizon to buy AOL for $50 per share, with AOL becoming a wholly owned subsidiary of Verizon when it is completed, the companies said. The transaction, which is expected to close this summer, is subject to customary regulatory approvals and closing conditions.

AOL began originally in 1985 as an online communications service called Q-Link, when the company was originally known as Quantum Computer Services. Quantum launched its first instant messaging service in 1989 and introduced the “You’ve got mail!” announcement that became a core identity of the company, which was renamed AOL, or America Online, in 1991.

Large media acquisitions like this one are increasingly common today as companies seek more ways of attracting new customers with increased content that users find valuable. Competitors, including Facebook, are also on the move constantly to find new sources of content that can help them stay one step ahead of competing content and advertising networks.

In March, a report surfaced saying that The New York Times, BuzzFeed and National Geographic, among others, are planning to launch a test program to host their content on Facebook, allowing users to read the latest news and feature articles without leaving the social network. Such moves help content sites such as Facebook remain “sticky” and important for users.

Web portals, including AOL, Yahoo, Google and others, have been following similar strategies to remain relevant in a fast-changing online and mobile-centric world so they can grow and sustain their audiences.