AOL's Conundrum: 2 Steps Forward, 1 Step Back

What can a shareholder make of AOL? It is a company with a problematic past, to be sure, but a potentially hopeful future.

AOL prides itself on shrugging off the skeptics who have been predicting its demise since its disastrous 2001 acquisition of Time Warner. And AOL is still here, determined to compete hotly against the media and tech world's ballyhooed content providers. That's the good news.

AOL Chief Executive Tim Armstrong has been trying to show Wall Street that he is dedicated to growth. AOL recently gobbled up Adap.tv, a worldwide video advertising mechanism, for $405 million. The acquisition burden consists of roughly $322 million in cash and $83 million in AOL common stock.

According to AOL's press release, the coming together of AOL On and Adap.tv will "give AOL a unique end-to-end solution and video stack for publishers and advertisers -- from premium original production, to content aggregation and syndication platforms, robust video CMS technology, and now a leading programmatic video platform."

The financial firm Barclays likes the move. It told investors in a recent report: "We think the acquisition is a strategic positive, as Adap.TV should be able to leverage the AOL Network's technology and relationships to drive revenue. However, we are cautious on valuation, as even if Adap.TV maintained its 100% revenue growth from FY12, valuation implies 2.7 times 2013 revenue, a premium to peers such as Tremor, though Adap.TV is a arguably a different type of platform."

AOL's shares have dropped abut 12% year to date compared with the S&P 500's gain of 19%. Over the past 12 months, AOL has added roughly 11% while the S&P index has jumped 20%.

For its part, Barclays said it continues to favor the AOL shares, encouraged by the company's steadfast cost cuts, which should push EBITDA in the quarters ahead. Barclays is keeping up its price target of $44.

Ah, if only the AOL story were this simple.

Now the lamentable news: From a public-relations point of view, AOL has seemed to be its own worst enemy at times. While there is not always a financial or investment problem, a misstep contributes to an impression that this is a company that takes two steps forward and then one step back in its development.

There was the star-crossed partnership with Time Warner, which might have actually been the single worst deal in modern American corporate history.

AOL's image as a dial-up company in a digital revolution didn't enhance its reputation. All in all, the company still has a long way to go before it can claim that it has made it all the way back from the dark days of the early 21st century.

CEO Armstrong raised questions about both his management style and sensitivity to the art of public relations when it was reported that he fired an employee at a meeting, heard by 1,000 employees. Armstrong had just told Wall Street stock pickers that Patch, AOL's collection of local websites, would be reduced to 600 from 900.

As you might imagine, the AOL employees were already on edge and very nervous about losing their jobs. Presumably, Armstrong was trying to rally his charges. He didn't succeed, to say the least. 

Although Armstrong has since issued an apology to his employees, AOL observers are disappointed that the company's well-calculated business moves get overshadowed by bad publicity. 

"It's doing the right thing with Patch," said Paul Carroll, a corporate consultant with the Devil's Advocate Group and the co-author of the book Billion Dollar Lessons. "AOL seemed to be trying to do too much, too soon. It appears that AOL is trying to accomplish the same things that Marissa Mayer is doing at Yahoo!."

From a big-picture perspective, Carroll said, AOL can be accused of making the same fundamental mistake of a company that often finds itself intent on containing damage done.

"The company sometimes seems like it's fighting the last battle, instead of the next battle," Carroll said. Parroting my question, he noted: "How does AOL move ahead? Well, probably not by firing a man on a conference call."

"Two steps forward and one step back" seems to sum up the AOL conundrum. Maybe, just maybe, someday this curious company will figure out how to make progress and silence any skeptics.


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