Internet Video

Google Buys AOL IPO Rights

12/30/2005 7:00 PM Eastern

Google Inc. will have the right to force an initial public offering of America Online beginning in July 2008 as part of its $1 billion investment in the Internet-service provider, according to documents filed with the Securities and Exchange Commission.

Google agreed on Dec. 20 to pay $1 billion for a 5% equity stake in AOL. Google and AOL will continue to provide search technology to AOL’s Internet properties worldwide. The agreement also will expand display advertising throughout the Google network and create an AOL Marketplace, enabling AOL to sell search advertising directly to advertisers on AOL-owned properties.

Google also agreed to collaborate with AOL on video search and to showcase AOL’s premium video service within Google Video.

In a Dec. 23 filing, AOL parent Time Warner Inc. revealed that beginning on July 1, 2008, Google will have certain rights to require the registration of AOL shares in a public offering. If Google exercises those rights, Time Warner has the option of purchasing Google’s interest either in cash or in Time Warner shares — based on an appraisal of the fair-market value of AOL — instead of initiating an IPO.

That Google paid $1 billion for a 5% equity slice of AOL implies a current valuation of the online giant of about $20 billion.

The Google deal came less than a week after The Wall Street Journal reported that Time Warner had entered into exclusive negotiations with the search giant, shutting out Microsoft Corp.

Microsoft had earlier been seen as the frontrunner for an AOL deal and had reportedly guaranteed a minimum amount of advertising revenue to the online provider.

While that doesn’t appear to be part of the Google deal, AOL does get access to the biggest search engine on the Internet — a technology Time Warner management has said was vital to AOL’s transition from a subscription-based to an advertising model — and gets a promotional boost for its online video services.

Google also protects a substantial revenue stream. Through its existing advertising agreement, AOL had accounted for as much as 10% of Google’s total advertising revenue last year.

In a research report, Banc of America Securities cable analyst Doug Shapiro saw the deal as a positive for AOL because it places a much higher valuation on AOL than the market does ($20 billion vs. his estimate of $10 billion). There’s also potential to address some of AOL’s strategic shortcomings (sluggish Web traffic, lack of direct economic exposure to search and a failure to capitalize on scale to take advantage of new technologies) and could jumpstart AOL’s transition to a destination Web site.

“The improved indexing of AOL content on Google and the speculated $300 million in keyword search credits could effectively send substantially more traffic toward AOL,” Shapiro wrote.

He also said, “More generally, Google is arguably the ideal technology partner.”

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