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.