Continue Reading Below
The all-cash deal values AOL at $50 a share, a 23% premium over the company's three-month volume-weighted average price. AOL shares rose 18% in premarket trading to $50.27. Verizon shares fell 1.6% to $49.
The acquisition would give Verizon, which has set its sights on entering the crowded online video marketplace, access to advanced technology AOL has developed for selling ads and delivering high-quality Web video.
The U.S. wireless business has matured in recent years, leaving carriers like Verizon, AT&T Inc. (T) and Sprint Corp. (S) increasingly fighting to steal market share from one another. Offering digital video over wireless connections represents a growth avenue in coming years for Verizon, which last year brought in $127 billion in revenue and profit of $12 billion.
Verizon has said it plans to launch a video service focused on mobile devices this summer. The company has offered few details, but last month Chief Financial Officer Fran Shammo said the service will offer a mix of paid, free and ad-supported content and won't try to replicate traditional TV.
The service will feature shorter snippets rather than 30 or 60 minute shows. It also could include multicast programming--a sort of broadcast service that uses cellular airwaves--for delivering live content like sports and concerts, along with on-demand viewing.
Continue Reading Below
That description has left a lot of room for interpretation, and some analysts briefed on the service recently by the company said they came away unimpressed. Verizon, however, like rival AT&T, believes video will be a primary driver of demand for its wireless network in the years ahead.
"This will have nothing to do with what you do in your house," Mr. Shammo said in an interview on April 22. "Millennials consume news in ways you can't even see on the TV."
Verizon already has relationships with many media providers due to its FiOS TV service, which is available in 5.6 million U.S. households. And it has shown prowess in mobile video already, including through a partnership with the NFL that allows it to stream some games over phones.
A year ago, Verizon agreed to pay what people familiar with the matter said was around $200 million to buy Intel Corp.'s (INTC) fledgling OnCue Internet video service --an asset that underpins the telecom company's upcoming offering.
For AOL, the sale is the latest chapter for a company that has redefined itself in recent years as a significant player in digital media and marketing, after originating as a pioneer in the dial-up Web access business and being involved in one of the most disastrous corporate mergers ever.
AOL eventually grew to more than 20 million dial-up subscribers and consummated a $183 billion megamerger with Time Warner Inc. (TWX) in 2000. The company's value dissipated quickly after the dot-com bust and ultimately Time Warner spun out AOL in 2009.
Under the leadership of Tim Armstrong, a former Google Inc. executive who took over as chief executive of AOL in 2009, the company has invested heavily in ad technology--including an automated, or "programmatic" platform that allows marketers to bid for inventory electronically. In 2013 AOL purchased Adap.tv, an "exchange" that connects buyers and sellers of online video advertising.
AOL also built a stable of content including online news sites such as Huffington Post, TechCrunch and Engadget. And it has even produced original Web series. It recently launched "Connected," a documentary-style series in which the subjects film themselves.
In 2014, AOL generated revenue of $2.5 billion, about 9% higher than the previous year, and a profit of $126 million. The company has been successful in growing the part of its business that helps other companies sell ads, but lately has struggled to grow ad sales for its owned-and-operated properties. AOL has cut costs by shutting down some of its core sites and through layoffs.
In an interview, Mr. Armstrong said that the combination of Verizon and AOL will "create what I think is the largest mobile and video business in the United States." Mr. Armstrong said he believes that AOL will now not only be able to compete with digital advertising giants Google and Facebook Inc., but will also be able to play in the rapidly emerging connected TV and mobile media and advertising sectors. "This gives us a real seat at the table for the future of media and technology," he said.
The deal is expected to close this summer, pending regulatory approvals. Mr. Armstrong will continue to lead AOL's operations, the companies said. Verizon expects to finance the acquisition through cash on hand and commercial paper.