Google Buying Stake in AOL for $1 Billion

By David A. Vise
Washington Post Staff Writer
Friday, December 16, 2005; 2:51 PM

Google Inc. is buying a 5 percent stake in Dulles-based America Online for $1 billion as part of a far-reaching business and advertising partnership that will link the two companies in many ways and will greatly enhance AOL's financial prospects, according to people familiar with the agreement.

The deal between Google and AOL is a setback for Microsoft Corp., which had sought to replace Google as the search engine on the AOL service and had been in talks with AOL's parent, Time Warner Corp, since January. Google is the leader in search, followed by Yahoo Inc. and Microsoft's MSN Search, which is a distant third.

Under the agreement, Google will remain the search engine on the AOL service with a revenue sharing from text-based ads provided by Google of about 80 percent to AOL and 20 percent to Google. In addition, AOL will get the exclusive right to sell other types of advertising, including banner ads, for the Google network. AOL will keep 20 percent of the proceeds from those ad sales, while Google will get about 80 percent.

"This is our dream come true," one source familiar with AOL and Time Warner's strategy said. "Our fates are intertwined."

AOL is already the largest single source of ad revenue for Google, generating about 10 percent of its ad dollars, according to public filings. AOL's business strategy under its chief executive, Jonathan Miller, is to garner more of its revenue in the future from rapidly-growing online advertising.

As part of the new agreement, AOL gains the right to sell Google-generated, text-based ads that appear on the AOL service. This change will enable AOL to sell all forms of online advertising itself to any company.

In addition, AOL's video service will get special promotion as part of Google's video offering. And AOL will have graphic ads that attract attention and appear alongside the text-based ads Google traditionally has displayed to the right of its free search results.

AOL will also be given a substantial fixed-dollar budget from Google to purchase advertising to promote the Internet service. Google's free search results, based on math equations that rank them according to relevancy, will not be changed as a result of the new partnership, sources said.

Google's $1 billion investment in AOL will give the AOL service, which has more than 20 million subscribers and a network of Web sites that includes AOL.com, Moviefone and Mapquest, an implied value of $20 billion. The five-year deal gives Time Warner the choice of maintaining its 95 percent ownership stake in AOL, or keeping majority ownership while spinning off a portion of AOL to shareholders as a way of boosting its stock price.

Time Warner has been under pressure from financier Carl Icahn to take steps to get its stock price up. Icahn, who owns 3 percent of the company and has been pushing management to do a big stock buyback, spin off its cable division and take other steps to enhance shareholder value. He immediately criticized the Google-AOL pact, calling it a travesty, according to news reports. He has said AOL failed to move fast enough on its own under Time Warner's ownership.

The terms of the agreement were reached around 9 p.m. Thursday night in New York in the Time Warner office suite of CEO Richard Parsons, where he was joined by Google CEO Eric Schmidt and AOL's Miller.

The Time Warner board of directors will vote on the agreement next week. In the interim days, lawyers for both sides will hammer out the legal details.

On Wall Street, as news began leaking of Google besting Microsoft today, Google's stock price topped $429 a share. The company, the leader in Internet search and advertising, went public in August 2004 for a price of $85-a-share.

In the end, a proposed joint advertising arrangement between AOL and Microsoft's MSN network proved complex and not as lucrative as the long-term potential of the partnership with Google.

"Microsoft is probably unhappy and hurt," a source familiar with the long-running talks said.


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