Verizon's $5 Billion Acquisition of AOL

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If Google has "won" the Internet -- and considering they get 50,000 page hits each second, it's safe to say they have -- then AOL has most likely "lost" it.  In 2000, AOL had the highest stock price of any web company, trading at nearly $100 per share, while the past decade and a half has seen that figure drop steadily to the point where the stock traded for just over $10 per share in 2010.  The decline and fall of America Online's empire made the May announcement all the more surprising when Verizon informed the world they would snap up the former Internet titan for a cool sum of $4.4 billion, or $50 per stock.  Verizon's decision to pay a pretty penny makes for an unusual combination.  What details of the deal give us insight into how the tech market will react to the trade?

Re-Invention Is The Mother Of Re-Necessity

Some tech companies show surprising capability to weather the storm of their competition and come out ahead.  When IBM looked dead in the water around 2002, for instance, the company decided to move away from computer hardware (where Microsoft had positively taken them to the ropes) in favor of manufacturing chips and providing consulting services.  The resulting move allowed them to move ahead of Microsoft in closing value during 2011 for the first time in a decade and a half.  AOL signed former Google Americas CEO Tim Armstrong to a lucrative contract in 2009 in the hopes of returning to relevancy.  Armstrong's first, and arguably most influential, policy de-tangled AOL's particularly toxic relationship with Time Warner.  AOL then snapped up so-called "content farms" like HuffingtonPost and TechCrunch, where they raked in clicks and ad sales.  Armstrong's moves gave AOL the best growth they'd experienced in a decade, at the height of the dot com bubble.  With their stock valued at fifty dollars per share, AOL gave Verizon a deal that both companies accepted for a hefty price tag.

Immediate Reactions

On the day of the sale, AOL stock (AOL on the NYSE, trading for $51 a share) rose by no less than 18% while Verizon stock (VZ on the NYSE, trading for $49 a share) dipped by nearly 2%.  That alone may indicate the market's reaction to the deal, leaving many questioning whether a web company and a mobile provider have enough in common to create a solid business partnership.  Verizon, however, has a strong history of innovation.  Remember that they offered the very first commercial Internet access, the very first fiber-optic digital television service, the very first wireless broadband service, and the very first web service without speed caps.  Their customer approval record positively blows competitors like Time Warner and Comcast out of the water, furthermore, which a major factor for their 50% growth in the past five years.  What's more, they've shown to made shrewd decisions when their competitors fell into blunders: Verizon never launched the pricing campaign for mobile customers that AT&T voraciously entered into, snapping up old contracts like candy, and Verizon has enjoyed better subscription growth than AT&T over the past six months in no small part to their refusal to race to the bottom.  It's too early to call it a slam-dunk hit, but the company's track record suggests that their calculated risk represents a very real opportunity for profit.  With $12 billion in profits last year, furthermore, this is a deal that Verizon can easily afford.

Into The Future

What's the main appeal of AOL's platform and customer base for Verizon?  First and foremost, it appears to be Verizon's entry into digital video.  Unless you've cut your TV cable and only spend a few minutes on the Internet each day, you may notice that companies are ruthlessly competing for your attention and your screen time.  HBO, NetFlix, and DirectTV have all invested billions of dollars in creating new video services and content for the average American who spends four to five hours a day watching video on one type of screen or another.  Verizon won't be using AOL to make original programs like Game of Thrones, but they'll compete with the big boys by leveraging AOL's video advertising niche to get an edge on companies who have video capability but lack marketing capability.  As Google has shown, controlling ad space can be more important than controlling anything else in media.  By bringing new media to existing customers and adding AOL customers into the fold, Verizon gets the chance to control the services by which we consume online information and entertainment, as well as the advertising mechanisms that said services rely upon.

Making A Choice

How does the Verizon-AOL deal affect your portfolio?  If you're lucky enough to already own stock in Verizon, you'll likely profit further from the investment in the months to come.  Verizon has paid an annual dividend of 4.4% for the past ten years, making it one of a very few number of stocks to have not just survived the Great Recession, but provided shareholders with profit in the meantime.  With 100 million subscribers on their side, the risk of a major downturn in their corporate performance appears slight.  The decision for most investors is whether or not Verizon's deal gives them an advantage over a very new type of competition in the form of digital video providers, a competition the company has yet to face down.  It's tempting to compare Verizon's 20% growth in the past two years against NetFlix's astronomical 165% growth and come away unimpressed, but it's worth remembering that NetFlix is riding the wave of volatility: with a 1.46 beta weighed against Verizon's .35 beta, the good times aren't going to last forever.  As Verizon diversifies their holdings, furthermore, they offer the chance for steady growth even if the company decides to pull out of a particular market.

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