Google confirmed its $1 billion investment in AOL, ending months of speculation over whether the deal would go through
Google Inc. has finalized the details of its expanded partnership with Time Warner’s America Online (AOL) subsidiary, including the acquisition of a 5 percent stake in AOL for US$1 billion, Google said in a filing with the U.S. Securities and Exchange Commission (SEC).
Google said that it had ironed out the final details of its expanded alliance with America Online, clearing the way for the online search-engine leader to invest $1 billion in its biggest advertising partner.
The two companies signed a definitive agreement to seal a deal originally announced in December, which also include a series of commercial arrangements, were signed on Friday, March 24, and the investment will close in the second quarter of this year, Google said.
The Mountain View, Calif.-based company will assume a 5% stake in Time Warner Inc.’s AOL in exchange for a $1-billion investment expected to be made some time during the three months ending in June.
Google expects the deal to close in the second quarter of 2006, it said in the filing.
For months last year, AOL toyed with the idea of ending its years-long technology and advertising partnership with Google and seeking better terms from a competitor, particularly Microsoft and its MSN Internet unit. But finally in December, AOL decided to continue using for an additional five years Google’s search engine to power its general Web search service. It also decided to keep carrying paid search ads Google sells to advertisers, from which AOL gets a commission.
AOL, which lost 2.8 million dial-up subscribers last year, has been expanding services it offers to both paying customers and those who visit its free Web portal to offset declining subscriber revenue.
The partnership will let AOL use Google’s search and advertising software.
The centerpiece of the expanded partnership is the stake Google agreed to take in AOL, but other parts of the agreement are also significant, such as Google’s declared intention to explore, with AOL’s help, the market for graphical online ads where it has until now only reluctantly dipped its toes.
In previous statements and SEC filings, Google has also disclosed that the agreement calls for the companies to link their respective instant message services and for AOL to assist Google with its video search service.
AOL has been Google’s biggest advertising partner for several years. In 2005, AOL accounted for $550 million, or 9 percent, of Google’s total revenue.
AOL also will get a $300 million credit to advertise its products and services through Google’s vast advertising network. Google, in turn, is depending on AOL to sell more graphic ads to help diversify its search engine beyond the text-based ads that generate most of the company’s profit.
The deal also gives Google the right to demand that AOL be spun off as a publicly traded company beginning in mid-2008, according to previously filed SEC documents.
The Google deal was not the favored course for AOL for one of Time Warner’s biggest shareholders. Carl Icahn, who holds a three percent stake in Time Warner, said in a letter to board members he questioned whether a Google partnership was the best way to unlock the value of AOL.
Time Warner shares rose five cents, to finish at $16.79 on the New York Stock Exchange.
Google’s shares surged $17.78, or 4.7 per cent, to close at $394.98 on the Nasdaq Stock Market. The company’s stock price has climbed by 15.5 per cent during the last four trading sessions as money managers adjust their investment portfolios to account for Google’s inclusion in the bellwether Standard & Poor’s 500 index after the markets close Friday.
Google’s investment in AOL rebuffed a rival bid by Microsoft Corp., which has been trying to build a formidable advertising network of its own.
In another development, Bloomberg News reported that Google planned to sell 5.3 million more shares, which would raise more than $2 billion.