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Signaling Confidence, AOL to Buy Ad Firm

Some see the Internet service provider's parent giving it another chance to return to glory.

June 25, 2004|Chris Gaither | Times Staff Writer

America Online said Thursday that it planned to acquire online marketing company Advertising.com Inc. for $435 million in cash, suggesting renewed confidence in the once-struggling AOL by its parent, Time Warner Inc.

The country's largest Internet service provider said it wanted to buy the Baltimore company to better compete with Yahoo Inc. and other rivals in the booming Internet advertising market. Advertising accounted for about 10% of AOL's revenue in its most recent quarter.

Advertising.com would be AOL's first big purchase since its merger with Time Warner closed in January 2001.

New York-based Time Warner, the world's biggest media company, had been considering several options for its online division, including a spinoff or sale. Thursday's announcement underscored the media titan's willingness to give AOL a chance to return to its past glory, analysts and AOL Chief Executive Jonathan Miller said.

"It says that we have the backing of the larger corporation," Miller said.

Advertising.com, which had been planning an initial public offering, places ads for clients on 1,500 websites, including Travelocity.com; those ads generate revenue when users click on them. According to Advertising.com, 110 million people see the ads every month.

Its sales rose 80% to $132 million last year, and it recorded net income of $18.7 million, according to a filing with the Securities and Exchange Commission. AOL invested $5 million in Advertising.com in 2000. As a customer, Time Warner accounts for less than 1% of Advertising.com's revenue, the companies said.

Dulles, Va.-based AOL would run Advertising.com as a separate business unit and continue selling ads to as many websites as possible, Miller said. That would mirror the way Yahoo's Overture Services division sells search-related ads to competing Internet companies.

If the deal is approved by regulators, Advertising.com would join a rejuvenated AOL, which has received public vows of support from top Time Warner brass in recent months.

AOL is profiting from the boom in online advertising, especially through a partnership with Google Inc. that places search-related ads on sites throughout the AOL network. And although many of its dial-up subscribers are defecting to other ISPs, AOL recently reported a 43% increase in first-quarter operating income.

Indeed, Time Warner seems to believe that AOL is on its way back, Merrill Lynch analyst Jessica Reif Cohen wrote in a research report released Thursday.

"Although the acquisition of Advertising.com is not [a] large, transforming transaction, we believe it sends a very important signal regarding management's willingness to invest in the AOL business," she wrote.

AOL expects the deal to close before the end of the summer.

Time Warner shares rose 7 cents Thursday to $17.42 on the New York Stock Exchange.

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