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What: Shares of AOL (NYSE:AOL) jumped 19% Tuesday after Verizon (NYSE:VZ) announced that it would be acquiring the company for $50 per share, or $4.4 billion. This news comes after AOL stock surged last week following an earnings beat. By 12:50 p.m., AOL stock was trading at $50.58 per share.
So what: In addition to its dial-up Internet subscription business, AOL is the fourth-largest online property in the United States. The company operates popular websites like The Huffington Post, TechCrunch, and Engadget, as well as a programmatic advertising platform.
Verizon has been planning an online video service, so the acquisition of AOL makes strategic sense. The advertising technology that Verizon will acquire from AOL is the main reason for the acquisition, according to Verizon president of operations John Stratton: "Certainly the subscription business and the content businesses are very noteworthy. For us, the principal interest was around the ad tech platform."
Verizon's upcoming video service will focus mainly on mobile devices, and it will offer a mix of paid, free, and ad-supported content. Details beyond that are scarce, but AOL's advertising technology fits in well with Verizon's mobile video ambitions.
Now what: Facing intense competition in the wireless business, Verizon is looking for new areas of growth. The combination of Verizon and AOL would create a potent competitor in the digital advertising business, and AOL CEO Tim Armstrong believes that the company will now be able to compete against advertising giants like Google and Facebook.
The acquisition is expected to close sometime this summer, and Verizon will be financing the deal through cash and commercial paper. AOL will become a wholly owned subsidiary of Verizon upon completion of the deal.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and Verizon Communications. The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.