America Online Back in Takeover Game

In the wake of the dot-com bubble -- and amid allegations of past revenue-recognition policies that were overagressive -- AOL's ad revenue had been steadily declining, as long-term contracts signed around or before the turn-of-the-century online advertising peak petered out.

AOL's ad revenue grew from $204 million in the fourth quarter of 2003 to $214 million in the first quarter of 2004, says AOL, giving the company two consecutive quarters of sequential revenue growth.

But the first quarter's figures were down from $226 million one year earlier, while AOL rival Yahoo! said its marketing services business, excluding acquisitions, grew 48% year over year in the first quarter.

Analysts seemed somewhat positive about the pact Thursday.

The deal should help AOL manage its brand advertising inventory, "an area where AOL has struggled mightily in recent years," wrote CIBC World Markets analyst Michael Gallant. Any impact on Time Warner's financials will be in the range of a rounding error initially, Gallant said, but likely will be accretive in 2005. Gallant has a sector outperformer rating on Time Warner; his firm has performed noninvestment banking, nonsecurities-related services for Time Warner within the past year.

Merrill Lynch analyst Jessica Reif Cohen wrote that the deal "sends a very important signal regarding management's willingness to invest in the AOL business." Although Cohen said she questioned the longer-term need for intermediaries such as Advertising.com, she wrote that the deal would benefit AOL in several ways, such as by helping the company use Advertising.com's network of sites to better-serve clients already advertising on AOL.

Time Warner's shares gained 4 cents Thursday to trade at $17.39.