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Market Wrap-up for May 12 - Inside Verizon's AOL Acquisition

Before the opening bell, Wall Street learned of a new M&A deal between telecom giant Verizon (VZ ) and internet provider AOL, Inc. (AOL).

The Deal

Verizon announced that it has agreed to buy AOL for $4.4 billion dollars in an all-cash deal, valuing AOL stock at $50 a share. Yesterday, AOL closed at $42.59 and this morning the stock gapped higher to $50.14 per share at the open. In the trailing 52-week period, AOL shares have traded in a range of between $33.20 and $50.30, with its volume-weighted (3-month) average price approximately $40.65. The deal therefore places a 23% premium over this VWAP price.

The acquisition gives Verizon access to AOL’s top-notch advertising technologies and its high quality online videos. In 2014, AOL grew revenues to $2.5 billion, a 9% increase from a year prior. For some time, VZ has expressed its intent to enter the crowded online video market; this summer, the company is slated to launch its mobile video service, which will offer both paid subscriptions and free ad-supported subscriptions.

VZ’s President of Operations, John Stratton, commented on the deal: “Certainly the subscription business and the content businesses are very noteworthy. For us, the principal interest was around the ad tech platform.”

An Evolving Industry

Today’s merger certainly puts Verizon in a better position to gain market share in the mobile and video businesses. At the same time, it’s crucial for investors to realize that this M&A is yet another example of how the telecom industry is evolving – and rather quickly. While we certainly don’t expect juggernauts like Verizon, AT&T and Sprint to go away anytime soon, underlying business operations have already seen a shift.

Verizon has already taken steps to downsize its wireline operations. In February, the company announced the sale of its local wireline business in California, Texas and Florida. Simultaneously, the company has beefed up its wireless and online streaming services, placing big bets on its “mobile first” initiative. AT&T, on the other hand, is taking a different approach in evolving its business; the company is expected to close on a $49 billion deal to buy DirectTV, which would make it the largest cable and satellite TV provider in the U.S.

Looking Ahead

In future quarters, it will be important to note how the evolving telecom industry’s shift towards different core businesses will affect future revenue and earnings, and perhaps even dividend policies. Theoretically, these latest acquisitions should produce synergies that will allow these companies to expand and better their businesses, ultimately creating more value for their shareholders.

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