Google finally sold back its 5 percent stake in AOL to Time Warner. Originally valued at $1 billion in 2005, Google ended up getting back only $283 million, including some cash distributions. There goes roughly $700 million, but Google already took a writedown on the investment back in the fourth quarter when the whole world was going to pot and nobody really noticed.
Time Warner took back the shares in preparation for the eventual public spinoff of AOL. When Google initially bought the shares, it valued AOL at $20 billion. Based on the price Time Warner paid for the repurchase of the shares, AOL is now worth $5.7 billion. I’m sure by the time it actually goes public, new CEO Tim Armstrong and AOL’s bankers are going to be arguing that it is worth a lot more.
So did Google get hosed on this investment? Pretty much. But you have to remember that it was part of a larger search outsourcing deal which Google still makes money from today. AOL on its own commands a 3 percent search market share and as such is probably Google’s largest partner site. Even if Google didn’t make back its investment over the past four years, the search volume AOL provides itself is worth paying for. (Search is a volume game, the more search queries you can throw ads against, the better the ROI). So don’t feel too bad for Google. It was buying distribution which helped it maintain its overall market dominance.
Update: According to this preliminary IPO document AOL filed with the SEC, last year the Google search partnership generated $678 million in search advertising revenues for AOL, or 32 percent of its total advertising revenues. Assuming that AOL struck an advantageous revenue sharing deal with Google and gets to keep at least 80 percent, that would mean Google’s 20 percent brought it $170 million in revenues. Multiply that by five years (the deal expires in 2010), add in the $283 million it got back for the shares, and it comes out of the whole deal with $1.1 billion. This is all back-of-the-envelope, but it is not hard to see how Google basically broke even on its investment.
Bad investement choice..
$700 million could have been used to buy an startup or on improving it’s business.
or 100 million veggie burritos. Google would have to be crazy to pass up on that many burritos.
They were buying market share, which did help its business.
That’s funny, we were just discussing AOL here: http://clean.an...ow_topic/101802
Umm, you naively think that investing means a monetary return of investment value. They were investing for the search partnership – which probably helped them maintain their search profits instead of a competitor stealing the search queries.
It also kept MSN and Yahoo! from partnering with AOL.
@Ramanean
I wouldn’t just say ‘a startup’ but many. But yes agreed. Imagine if they put that 700 million into their OS research and dev. Or heck even Google Docs / Apps / Enterprise. Man on man they could have done some serious damage.
That was a steep price to pay for keeping the P/E ratio high– but I do think that the new blogging platform should do well into the future.
In fact, Tim, you can buy http://www.dishiness.com right now! Just throw us a few shares
Or should I have said as Erick did, Time Armstrong,… love ya Schonfeld
Wow what alot of money to lose out on even on Googles terms
Sometime you have to loose in order to gain something else…or maintain it…as Erick already said.
Yeah… title should have read: “There goes the ad revenue from 140 million Penis Enlargement ads”
Just goes to show, no one is on top forever. It seems hard to believe right now, but Google itself could end up a lot less valuable in the not too distant future.
I wonder if the sale had anything to do with AOL’s new CEO being a former Google-guy. Some conflict of interest or something.
Anyone who believes that “AOL is now worth $5.7 billion” is a complete idiot.
AOL’s value should be Net Asset Value + 10x after tax cash flow. Or 38 cents. Whichever is larger.
For $700M USD you could buy 26% of Chipotle Mexican Grill.
“Or 38 cents. Whichever is larger.” LOL
It’s an interesting situation that Google got into. The other options to consider might be they needed more cashflow, it was a means to reduce further loss, or there may be a future joint venture between Google and Time Warner on the media front that will prove to be more valuable. It’s interesting to speculate on, but in the end they got what it was worth in todays dollars.
They must’ve been in negotiations as well as running the numbers and brainstorming about the highest and best use of the Asset that was left. It’d have been a tough choice.
That’s odd. Google doesn’t usually lose out in it’s investments.
Google doesn’t usually strike deals with companies as completely retarded as AOL – they buy excellent but completely undervalued companies outright then put them on the shelf to die. Google got what it deserved. AOL played dumb and won big while Google bled cash for nothing. That takes some acting ability. Score AOL: +1 Google: 0
There are so many great things that disappeared under AOL. ICQ, Winamp, Netscape just to name few
So would this make Google finally do away with the DMOZ directory(owned by Netscape which is owned by AOL) advantage that it gives to websites listed there?
There is no real advantage anymore. Say you just started a blog – it matters very little these days if you get into DMOZ or not. Being a good writer and attracting a growing readership should be your only priorities – and that’s as it should have always been. DMOZ was an artificial hoop you had to jump through. No one who cares about your content cares if you’re in DMOZ, and from what I gather search engines are not assigning as much rank based on a DMOZ listing as they used to…
Time Warner & AOL swindled Google good. I bet some of the aol and timewarner exec’s are having a good laugh right now.
I second that. AOL has been in decline since the 1990s, before Google was ever born. Investing in them was just plain stupid. Or if you argue that the idea of investing in them wasn’t stupid, it’s execution certainly was. I.e. the deal terms should have covered these downside risks better. Someone at Google and/or their law firm made rookie mistake(s).
The declining value of AOL could a lot have to do
with the consumer changes. Jack Shafer wrote an
interesting article in 2006 about the decline of
newspapers. One of points was that the media
moguls enjoyed a monopoly of some sort for a
while and for a longer time together with advertising forced on consumers all too often what they didn’t want. Like having to buy all 24 prints from a film with that many pics. And not just those someone wanted printed.
Article is about newspapers, but applies to other
media as well:
http://www.slat...com/id/2154678/
For 700 million they could have created NING ahhahahah” HIYO” http://www.yout...h?v=Ji-cT58rgNc
Wait the evaluation was 750 million?
AOL never understood how good their visitors are.