In yet another instance of consolidation in the telecommunications industry, Verizon has announced that it will acquire AOL for $4.4 billion (at $50 per share). The acquisition is intended to help Verizon expand its over-the-top video and digital content services. Verizon is on the verge of launching a mobile-first digital video platform, a service which would rival comparable options like Sling TV. The AOL acquisition also includes the company’s content brands like TechCrunch and The Huffington Post, so it's a sensible move for Verizon in working towards expansion in the digital media and advertising.
The deal has been viewed as a victory of sorts for AOL, a company that once dominated connection to the Internet but has drastically declined in popularity in recent years. Following the announcement of the acquisition, AOL’s stocks surged more than 18 percent. Verizon’s stock fell 0.8 percent. AOL also announced that chairman and CEO Tim Armstrong will continue leading the company following the acquisition. The acquisition doesn’t necessarily mark the end of AOL’s run, as both companies view the deal as mutually beneficial and AOL is set to become a separate division within Verizon.
Those familiar with AOL’s past, however, should be wary of any merger. The company was bought by Time Warner for $164 billion in 2000, a landmark Internet media deal that Time Warner’s Jeff Bewkes would later call “the biggest mistake in corporate history.” As Bloomberg reports, AOL’s overvaluation quickly led to massive losses (a reported $99 billion in 2003) and strained relations for both companies. AOL was eventually dumped by Time Warner and split off as an independent company.
Time Warner has been in the news again lately for another failed merger — this one due to government regulation rather than bad business. Comcast dropped its proposed merger with Time Warner last month, a move which prevented the creation of a dominant cable television provider in the U.S. Although that deal fell through, mergers between AT&T and DirecTV, AOL and Verizon, and others demonstrate how popular consolidation has become in the telecommunications industry in recent years.
This merger will be subjected to government review. Considering the fact that AOL and Verizon are different companies with different services, it’s unlikely that this acquisition will attract as much scrutiny as Comcast-Time Warner. Yet stock investors and the public alike should remain wary of any instance of consolidation in this industry. For consumers, deals like the one being made by AOL and Verizon show how digital content is moving towards mobile and companies are slowly building alternatives to traditional cable TV. There’s still enough competition in this space that consumers will likely benefit from deals like this, but any further consolidation should at least be eyed with some skepticism.
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