Updated from 9:50 a.m. to include additional analysis in the sixth and twenty first paragraphs.
In that aspect, the deal has echoes of the ill-fated merger of AOL and Time Warner (TWX) in 2000. But unlike that deal, which eventually was undone, this combination appears to give Verizon plenty of advantages.
The deal "expands Verizon's offerings in areas like mobile and video," said Angelo Zino, analyst at S&P Caital IQ. "AOL has built some great content and that'll be a key for Verizon. It gives Verizon growth opportunities in a lot of areas, like advertising, and it fits in with the whole over-the-top initiative they're doing."
Zino rates Verizon shares as a hold with a $52 price target. It's currently above $49.
Verizon is a leader in smart devices, touching nearly two-thirds of all Internet traffic. And AOL is increasingly focusing on video, a good fit. The deal appears to make sense from a fiscal standpoint, as ad dollars continue to go digital. According to eMarketer, mobile Internet ad spending is expected to top $101 billion in 2016, ultimately reaching $195.6 billion by 2016.
Capital Advisors portfolio manager Channing Smith noted the deal "initially surprised" him, but it shows that Verizon is "committed to building out its mobile and video content offering for its wireless customers," with AOL's success helping serve "as a nice spring board into this strategic initiative." Capital Advisors owns Verizon shares in its dividend strategy fund.
A Verizon employee speaking on the condition of anonymity said it was a surprise that the deal took this long. Rumors had been circulating since the beginning of 2015 that Verizon was interested in acquiring AOL.
In 2000, AOL acquired Time Warner in an effort to get more content to its dial-up subscribers, ultimately paying $162 billion for Time Warner. The deal was seen as a merger of equals, but problems stemming from different cultures, unfulfilled synergies and the dot-com bust led to the deal ultimately being labeled a failure.
AOL is not only a leader in video, but in programmatic advertising too. Programmatic advertising helps publishers automate ad sales and make the process more efficient, instead of the traditional method of pitching ads.
Verizon appears to see this as a play on both video and the Internet of Things.
Lowell McAdam, Verizon's chairman and CEO, said in a statement, "Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform. This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."
AOL CEO Tim Armstrong's decision to boost the company's profile in programmatic advertising has paid off for shareholders, as the transaction shows.
Over the past three years, Armstrong has spent three quarters of a billion dollars on this initiative. Sales related to AOL's programmatic platform jumped 80% in the first quarter, while accounting for 45% of the company's overall brand advertising revenue.
"If you look at AOL over the last five years ... we turned the company around," Armstrong said in an interview with CNBC. "We outperformed the S&P 500 (SPY) for the last five years, and when you look at where we are today and where we're going, we've made AOL as big as it can possibly be in today's landscape. But if you look forward five years, you're going to be in a space where there are going to be massive, global-scale networks, and there's no better partner for us to go forward with than Verizon."
Verizon is buying AOL for $4.4 billion, valuing AOL at $50 a share, an 18% premium to Monday's closing price. The New York-based telecom said it would fund the deal with cash on hand and commercial paper.
Once the deal closes, New York-based AOL will become a wholly owned subsidiary of Verizon, which is also based in New York. The deal is expected to be completed this summer.
Speaking at a Jefferies conference after the deal was announced, Verizon executive John Stratton said the goal was to go after millennial viewers, who are getting their content increasingly through smart devices instead of traditional delivery methods.
It's possible this is a precursor to more deals like this, as more content distributors buy content owners.
"I think you'll see more of that happening," Zino said, without speculating what other names could potentially follow suit.
IBISWorld analyst Sarah Kahn noted that if the deal is approved by regulators, there's a chance others will join the race. "If approved by regulators, the Verizon-AOL deal is expected to trigger a race among other industry players to invest their capital and research on mobile video consumption and advertising," Kahn said via email. "The advertising and video race to consumers' pockets has begun."
AOL is also home to several content sites, including The Huffington Post (which it bought for $250 million several years back), TechCrunch, and legacy content houses like DailyFinance.
Whether these sites remain under Verizon's umbrella or are spun off to a third party remains to be seen.