AOL users and investors were greeted by big news this morning: The online giant has agreed to buy out the 6-year-old news web site Huffington Post for a cool $315 million.
The move is interesting for a number of reasons – it’s the latest move from AOL chief exec Tim Armstrong to right the struggling web content arm of his company, and it’s a deal that has some calling the politically active Arianna Huffington a “sellout.”
But perhaps most interesting is the fact a fledgling web site like HuffPo was seen by AOL not just as a buyout target but as a strategic partner that can revitalize a firm many times its size. How? By keeping the feisty Huffington at the helm of content, rather than forcing her to bend to the will over her new corporate bosses.
It’s a fascinating move, and also a bit embarrassing for AOL. The company is still soundly profitable, but that is almost entirely thanks to legacy dial-up internet business. Just last week AOL reported a 26% drop in earnings for the fourth quarter – coinciding with a 30% drop in ad revenue for the period across its media family. AOL sites include personal finance portal WalletPop.cop, entertainment site PopEater.com, sports blog FanHouse.com among others.
In short, if the company ever hopes to see growth it has to do it by improving its editorial quality and by selling more ads.
AOL had previously expected to meet these goals through in-house initiatives, but clearly CEO Tim Armstrong has changed course. AOL bought popular technology and electronics blog Tech Crunch for $30 million last fall. Now HuffPo joins the fold at 10 times the price tag. And with $720 million in cash on the books, online powerhouse AOL has the clout to continue to wheel and deal.
But perhaps most telling is that AOL and Armstrong aren’t just snatching up other companies for their clicks and readers, they are also buying the editorial staffs in the hope of finding a model that works. Because frankly, their own model hasn’t.
But the Huffington Post deal is not without its challenges. Arianna Huffington clearly has her own liberal axe to grind, and it’s going to be interesting to see how she transitions from behind the closed doors of a private company to the editor of a very public and scrutinized stock. Also interesting will be whether AOL truly means to listen to Huff Post leadership on content, or whether it will forge ahead with a rather soulless corporate structure Armstrong is apparently rolling out, as evidenced by leak of a 58 page AOL content strategy presentation last week.
Whatever the outcome of the Huffington Post buyout, the one sure thing is that more media companies will follow it into the AOL fold. The online giant is comfortably profitable with a lot of money on its balance sheet and top exec who’s committed to overhauling the editorial mission of the site sooner rather than later.
Of course, whether AOL is profitable five or 10 years from now is wholly dependent on whether Armstrong is being smart with these strategic buyouts or just throwing money at a problem he doesn’t really know how to fix.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP.
