Verizon buys faded Internet pioneer AOL for $4.4bn

Verizon unveiled plans Tuesday to buy AOL for $4.4 billion, bringing together the US telecom giant and faded Internet pioneer in a bid to compete better in online media and advertising.

The deal was described as a way to help Verizon -- one of the largest US mobile carriers and a major broadband provider -- build its offerings in video and other digital content, especially for wireless.

"Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform," Verizon chairman and chief executive Lowell McAdam said in a statement.

"This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."

Once the leading provider of Internet access, AOL has reorganized primarily as a digital media company with a portfolio of well-known news sites such as The Huffington Post, TechCrunch and Engadget.

It also produces its own video content, operates its own advertising platform and continues to serve a small number of dial-up Internet customers.

- No more 'dumb pipes' -

Analysts said the deal gives Verizon a more diverse array of offerings to draw in customers as consumers look to online platforms like Netflix and Amazon instead of traditional television.

"The issue for all the telecom companies is they don't want to be turned into dumb pipes," said Roger Kay at Endpoint Technologies Associates.

"We don't know what their plans are but they need differentiated content to get people to come to their platform."

Rebecca Lieb, an analyst who follows digital media for Altimeter Group, said the primary motivator for this deal is video.

"Verizon has the pipes, AOL the ability to monetize streaming video with advertising," she said.

"In that respect, the alliance makes a great deal of sense for both players as digital video continues to gain traction and viewers, and as cord-cutting accelerates as a trend."

Barclays analysts outlined a similar rationale for the deal.

"There is clearly an increasing amount of content being consumed on mobile, thus providing a requisite growth in the potential mobile advertising market to consider," the analysts said in a note to clients.

Verizon said it is paying $50 per share of AOL, whose stock price jumped by almost 18 percent on the deal and was trading at $50.24 in early market action.

Verizon said the deal, which it would fund from cash on hand and commercial paper, is subject to regulatory approvals and is expected to close in the coming months.

- New chapter for AOL -

AOL rose to fame in the 1990s as the dominant provider of Internet access for Americans. The company distributed CDs enabling computer users to access the Internet for a monthly fee via dial-up, before consumers turned to cable or fiber for high-speed access.

AOL took over media giant Time Warner in 2001 at the height of the dot-com boom, with AOL using its inflated stock as a currency for the transaction. The deal valuing the firms at $165 billion was among the largest corporate mergers ever.

But Time Warner was forced in 2002 to massively write down the value of AOL and the two firms split at the end of 2009.

The company has evolved rapidly since then and has focused on digital content and advertising platforms.

Verizon, one of the biggest mobile carriers in the United States, is looking for ways to expand its footprint in an increasingly mature cellphone market.

AOL has been long rumored to be seeking a merger partner, with considerable talk of a tie-up with Yahoo which never materialized. Verizon could bring in the financial resources for a push into online advertising.

AOL took just 0.74 percent market share of the $145 billion digital advertising market worldwide in 2014, according to eMarketer, trailing Google with some 31.4 percent and Facebook's 7.9 percent.

Tim Armstrong, AOL chairman and CEO, will continue to lead AOL operations after closing.

"The visions of Verizon and AOL are shared," Armstrong said in the statement.

Verizon shares were down 0.96 percent at $49.32.