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Google to Invest $1 Billion for 5 Percent Stake in AOL

Dec 21, 2005  •  Post A Comment

As expected, Time Warner’s America Online reached an agreement late Tuesday with online search company Google, under which Google will make a billion-dollar investment in AOL and deepen its advertising partnership with the online service.

Under the terms of the deal Google will pay $1 billion for a 5 percent stake in AOL. In addition, Google will continue to provide search functions for various AOL Web sites, as it has done since 2002, when the two companies first began to work together.

AOL will also now sell search advertising directly to advertisers using Google’s search-results technology, which allows advertisers to display ads in relevant search results. Also, AOL’s video service will work closely with Google’s video service. The two companies also plan to enable their respective instant messaging to communicate with each other.

The deal, which was announced late Tuesday, would build upon the three-year-old relationship AOL and Google have, under which Google provides search functions for AOL members. That partnership is estimated to have generated $300 million in 2004, or around 10 percent of Google’s revenue.

The highly anticipated partnership, which began to take shape late last week, caps a months-long dance that had pitted some of the biggest names in online search against each other for the chance to do business with AOL, one of the most coveted brands on the Internet. Among the big names that have expressed interest in doing business with AOL are Software titan Microsoft, portal giant Yahoo and even the nation’s largest cable operator, Comcast.

After suffering a series of blows due to the contraction of its bread-and-butter dial-up business, AOL has experienced an upswing in recent months as it makes more of its content available to nonusers. That, coupled with the huge opportunities to take advantage of the growth in online advertising, has generated among major online players strong interest in forging a relationship with AOL.

Google’s investment in AOL puts the value of the Time Warner division at around $20 billion-about twice what many on Wall Street estimate as AOL’s value. That could help quell some of the unrest being created by financier Carl Icahn, who in recent months has been pressing Time Warner management to make some significant shifts in strategy, including selling off assets and boosting Time Warner’s share-buyback program.

Mr. Icahn as recently as earlier this week told shareholders he had misgivings about an AOL-Google partnership, arguing such an alliance might not fully value the service the way a merger with eBay or Barry Diller’s IAC/InterActiveCorp might.