Earlier today, Verizon Communications Inc. (NYSE:VZ) announced that it will acquire AOL, Inc. (NYSE:AOL) for $50 per share, or about $4.4 billion total. Following the announcement, AOL shares shot up more than 17% to just over $50, marking a new 52-week high for the stock. Shares of Verizon fell less than 1%.
Verizon views the acquisition as a significant step towards building its digital and video platforms. The acquisition includes AOL’s subsidiaries of The Huffington Post, TechCrunch, Engadget, and MAKERS.
AOL’s strength lies in digital content and online advertising. Together, Verizon and AOL will achieve economies of scale in order to create a “mobile-first platform,” which eMarketer estimates to be a $600 billion industry.
However, eMarketer also stated that AOL had only a 0.74% stake in the global digital ad market in 2014, though slightly more competitive in the United States with 2.1% market share of the domestic market share.
Globally, AOL was dwarfed compared to Google with an overwhelming 31.4% global digital ad market and Facebook with 7.9%.
Verizon CEO Lowell McAdam commented on the complementary synergies of the two companies, noting, “At Verizon, we’ve been strategically investing in emerging technology, including Verizon Digital Media Services and OTT… AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams.”
AOL CEO Tim Armstrong also noted the unique power that the combined companies will achieve, noting, “Verizon is a leader in mobile and OTT connected platforms, and the combination of Verizon and AOL creates a unique and scaled mobile and OTT media platform for creators, consumers and advertisers.” Armstrong will continue to lead AOL after the acquisition.
Despite the surge in AOL shares, Cantor Fitzgerald analyst Youssef Squali downgraded AOL from Buy to Sell with a $47 price target after the Verizon acquisition was announced. Squali rationalized his downgrade with “the fact that at $50/share, or ~8x our 2015 OIDBA, we find the valuation relatively fair for a company growing mid-single digits and ~20% OIDBA margins” and the belief that AOL will most likely not see a higher bidder. Despite the analyst’s sudden bearish views on AOL, he believes the acquisition will be good news for Yahoo Inc. Squali explains that Yahoo is “the last remaining large scale digital Media company of its kind” and has an interesting combination of assets such as Video, Mobile, and Social.
Youssef Squali has rated AOL 9 times since March 2011. When measuring his AOL recommendations ove a three-month horizon, Squali has a 63% success rate recommending the stock with a 0.09% average return per AOL rating. Overall, Squali has a 69% success rate recommending stocks over a one-year horizon with a +23.1% average return per rating.
On the other hand, Squali has rated Yahoo 24 times since April 2009 earning a 68% success rate recommending the stock with a +12.5% average return per YHOO rating. Squali has never provided a rating for Verizon.