America Online Inc. said yesterday it is buying Advertising.com Inc. for $435 million in cash, the firm's first major acquisition since its troubled merger with Time Warner Inc. in 2001.
AOL executives said the acquisition would enable the Dulles firm to garner a larger share of the rapidly growing online advertising market, which exceeded $7 billion last year, by giving it a direct stake in so-called pay-for-performance advertising. Corporations increasingly have turned to deals with search-engine companies -- especially Google Inc. and Yahoo Inc. -- and other firms, including Advertising.com, that let them pay for ads based on the number of customers who respond, rather than paying a set fee tied to the number of visitors to a particular Web site.
Wall Street analysts hailed the deal as a turning point for AOL, saying it was a clear indication that Time Warner now views the once-struggling Internet firm as an engine of growth.
"It is a moment of significance," said AOL chief executive Jonathan F. Miller. "In the advertising arena, we intend to go forward very competitively and play big across the board in all forms of Internet advertising. This acquisition says that in no uncertain terms."
Advertising.com, based in Baltimore, develops and tracks marketing campaigns for companies that buy ads on Web sites and also acts as a broker of sorts.
In an unusual twist, Advertising.com goes a step further than a typical advertising agency by actually purchasing advertising space from search engines and Web sites, then reselling it to companies. In that regard, Advertising.com takes on more financial risk than a traditional ad agency, which advises a company on where to advertise but does not own ad space itself.
Advertising.com buys ad space from sites including Yahoo's Overture search engine, Dictionary.com and Excite.
When Circuit City Stores Inc. wanted to ramp up its online sales but hold down its ad budget, the Richmond-based retailer turned to Advertising.com for advice and assistance on where, when and how to place ads on the Internet. The firm's software and advice enabled Circuit City to exceed its online sales goals and to spend less money in the process, the advertising agency said.
Advertising.com had filed papers with the Securities and Exchange Commission indicating plans to go public. But company officials said they opted to strike a deal with AOL instead because it would enable the firm to grow more rapidly.
"We were going public to seek resources to help us grow," said Scott A. Ferber, Advertising.com's chief executive. "Being part of the largest media company in the world, and being a key partner of AOL, gives us a better capability to get bigger, faster."
Advertising.com, which has done work for more than 800 companies, lost $25.8 million last year on sales of $132 million. The loss resulted from a non-cash accounting adjustment; the company posted $12.1 million in operating income.
In the first quarter of 2004, Advertising.com lost $47.3 million on sales of $46.1 million, compared with net income of $9.1 million on sales of $26.6 million in the same period a year earlier. The loss was attributable to a $50.8 million charge from another non-cash accounting adjustment. Operating income in the period was $5.6 million, four times the figure for the first quarter of 2003.
Advertising.com warned that its recent growth may not be sustainable. If businesses find ways to effectively buy advertising from Web sites on their own, it could hurt Advertising.com by eliminating its role as a middleman, the company disclosed in a filing with the SEC.
Miller said that in addition to the revenue it produces through its core business, Advertising.com has the potential to boost the sale of ads on America Online. AOL has had difficulty building its own ad sales force, but has profited immensely from an advertising partnership with Google.
"We will derive significant revenue," Miller predicted of the pending acquisition, which requires regulatory approvals.
A number of analysts agreed that the transaction appeared to be a plus for AOL.
"While we do not fully understand why AOL needs to acquire this technology rather than develop it internally, Advertising.com appears to be a strong business in and of itself," wrote Richard Greenfield, an analyst with Fulcrum Global Partners.
Miller said AOL was already familiar with the inner workings of Advertising.com because it had invested in the company several years ago during an early round of venture capital financing. AOL invested $5 million in the firm during 2000, he said.