Verizon's buy of AOL would offer edge against Google, Facebook on mobile ads

Supporters of deal say carrier competition requires long-term strategy with video

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In the Internet era, many multibillion-dollar acquisitions sound insanely ambitious and out of line.

Verizon's plan to buy AOL for $4.4 billion might seem to fit that high degree of corporate ambition — on the surface. The plan seems especially lofty since first-quarter revenues for AOL were $625 million, just 2% of the $32 billion in revenues that Verizon achieved for the same period.

Even so, a range of analysts on Tuesday said Verizon's acquisition is not terribly out of whack. They noted that Verizon is investing in a long-term future strategy that includes massive wireless video usage by consumers using smartphones and other devices. With the deal, Verizon gets the ability to provide the video content and advertising that AOL brings.

Keeping in mind Verizon's high price to acquire AOL, Moody's Investors Service summed up the rationale: "Despite the high acquisition multiple, Moody's believes that the transaction will support Verizon's long term strategy of promoting and monetizing mobile video."

AOL's ability to provide programmatic advertising to Verizon, once the deal is finalized, may be the most important key to the acquisition's value. AOL's third-party advertising division grew 19% in the first quarter to $231 million, which Verizon clearly appreciates.

The overall advertising market for mobile and other technologies is indeed enormous and growing dramatically. Spending on ad purchases in technology is growing by 15% a year and will surpass $150 billion in 2015, according to Technology Business Research.

In essence, Verizon wants to become more like a Google or a Facebook or a Yahoo, offering up mobile ads to generate revenues. "Even Microsoft [is in that space] and all are flexing their digital advertising muscles and are moving targets," said Ken Odeluga, market analyst for City Index. "The opportunity from monetization of AOL's content far outweighs the $4.4 billion outlay, considering not just the content ownership, but the proprietary digital ad sales platform."

Gartner analyst Bill Menezes called Verizon's costs to pick up AOL "pocket change," given Verizon's size and available cash. "Verizon's risk is pretty low, and the potential rewards are high if it can successfully leverage the whole digital content and advertising capabilities that AOL brings on board," he said.

Menezes said Verizon will gain a key advantage with AOL by being able to expand its video market to whereever a customer – and not just a Verizon Wireless subscriber -- is located on a cellular or a Wi-Fi signal.

While the short-term benefit to Verizon isn't good, there's no doubt Verizon is hoping to stave off competition from AT&T and other wireless carriers that provide and finance costly LTE wireless and more conventional networks that need to draw in new sources of revenue. AT&T is separately in preparations to buy DirecTV, much for the same reasons that have led to Verizon's plan to buy AOL.

"As the turf battle for how to deliver content to the public escalates, industry leaders in telecom are likely to continue to aggressively pursue acquisition strategies that will help catapult them ahead of their peers," said Phillip Torrence, head of securities and corporate governance practice groups at the law firm Honigman Miller Schwartz and Cohn. Torrence said Verizon and others don't want to find themselves similar to BlockBuster "and miss the next wave in delivery of content."

Longtime industry analyst Rob Enderle of The Enderle Group said Verizon's planned purchase of AOL shows "that Verizon is far more worried than they have let on with Google's aggressive moves into their space and the very aggressive T-Mobile customer acquisition strategy." Unlike Moody's and some other analysts who find the AOL acquisition generally positive, Enderle predicted it will flop.

"Verizon is attempting to change the game, but the strategy they have chosen appears almost certain to fail," Enderle said.

Another criticism of the deal was leveled by Free Press, a nonprofit public interest group. The acquisition is "yet another example of how Wall Street's short-term mindset shortchanges competition and investment in American infrastructure," said Free Press Research Director Derek Turner.

For the $4.4 billion Verizon is paying, the carrier could deploy its FiOS fiber-optic cable Internet service across its entire service area, "bringing much-needed services and competition to communities like Baltimore, Boston and Buffalo," Turner added. "It's hard to see how this transaction is good for anyone but a few brokers and lawyers."

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