Verizon & AOL: An inevitable match

Andy Serwer
·Editor in Chief
Verizon & AOL: An inevitable match

Perhaps it was inevitable that Verizon (VZ) would buy AOL (AOL), and not just because the giant telco company is looking to push into content, mobile and video, and AOL—a frequently mentioned takeover target—offers just that. Yes, that’s true as far as it goes, but take a step back and look at the $4.4 billion all-cash deal in context and other potent subplots emerge.

First, Verizon and AOL are both the products, or byproducts really, of two of the biggest conglomerates in the history of business. And with all the deal-making these two firms have gone through over the years, perhaps it's not surprising they've now come together. Verizon is a descendant of the old AT&T of course, Ma Bell, which was broken apart by divestiture in 1982, only to remorph back through Wall Street alchemy and deregulation into two giant communications companies, Verizon and a new version of AT&T. Wags may now have fun considering that Arianna Huffington, the head of the Huffington Post and a charter member of the chattering class, now works for the telephone company. (Calling Lily Tomlin: “One ringy dingy. Two ringy dingy…”)

Meanwhile, AOL was famously -- or infamously -- a party to one of the largest and what is generally considered to be the worst mega-merger of all time when it bought Time Warner for $183 billion in 2000. Oh, how the mighty have fallen. At that point, AOL, (again the purchaser back then), created a company worth $350 billion at its peak. Today, AOL (the target) is to be bought for $4.4 billion. (Yahoo Finance's parent company, Yahoo (YHOO), had been mentioned as a possible merging partner with AOL. Yahoo stock was up a smidge on news of the deal. Some say this deal may put a value on Yahoo’s core business.)

Related: Verizon focused on future growth with AOL bid

Interestingly, Yahoo Finance has learned that according to a former Time Warner executive, Time Warner tried to shop AOL with a $20 billion valuation in the mid-2000s. Time Warner execs approached Apple CEO Steve Jobs who was mildly interested, but Time Warner executives decided not to pursue the deal with Jobs because they didn’t think Apple’s market capitalization at the time was big enough to consummate the deal. Indeed, times have changed. (Time Warner ended up spinning out AOL in 2009.)

The second reason this deal has an inevitable feel to it is the timeless tug and pull between content companies and distribution companies—which was what the AOL/Time Warner coupling was all about. Ditto Comcast/NBCU. The thinking is that you can supercharge content, in this case AOL’s core business, plus its brands, including the aforementioned HuffPo, TechCrunch, Engadget, Moviefone and others over your pipes — in this case, Verizon’s network. In an interview on CNBC, AOL CEO Tim Armstrong said that he had “…made AOL as big as it can possibly be in today's landscape,” and that “It's really not about selling the company today. It's about setting up for the next five to 10 years.”

That may make sense from the AOL side. Armstrong, who will stay at the company, is selling out at close to an all-time at a $50 a share, some 20% premium over AOL’s recent price. Overall, Armstrong looks pretty good here. He took a severely crippled company with a defunct business model and basically doubled its value over six years. Nothing wrong with that.

As for Verizon, it needs to find a way out of its slow growth box. Former CEO Ivan Seidenberg and current CEO Lowell McAdam made a big move into premium broadband by pushing out its FiOS TV service, but this strategy hasn’t particularly leveraged the company’s mobile business. Note also that this is a small deal for Verizon, and who knows which brands, if any, get to keep their names down the road. What Verizon does get by the way is Armstrong, who really knows digital advertising. That may be value enough for Verizon. (It’s worth noting that Verizon’s stock dropped on the news.)

Does inevitability make for a sound business strategy? That’s unclear. For sure, AOL/Time Warner didn’t work out—though this deal is orders of magnitude smaller—while it’s too soon to judge Comcast/NBCU. There is, however, one party particularly pleased by the deal, and that's Wall Street dealmakers who’ve made hundreds of million of dollars in fees putting together and taking apart AT&T and AOL/Time Warner and their offspring. There’s certainly inevitability and a sound business strategy to that.