May 12, 2015 · 9 minutes

“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”  Lewis Carroll, Alice’s Adventures in Wonderland
What is it about AOL mergers that make no sense?

I've spent the morning intermittently reading various reports by the financial press about Verizon's surprise/not surprise acquisition of AOL. Early on, they seem divided on whether it was about buying ad tech or content, with many pundits saying Verizon was going the Comcast route... and then it became clear that AOL's biggest media asset, the Huffington Post, would likely be spun off. The press was similarly divided on whether or not Armstrong was long shopping this company or simply got wowed by how awesome Verizon is during a meeting at Sun Valley.

But everyone -- including the company-- insists this deal was about two buzzwords: Mobile. Video. AOL put out some dizzying justifications and everyone nodded like they totally understood.

Wait, what?

Let’s not pretend for a moment that when Verizon called its bankers they said “We must dominate mobile video. Get us… AOL!” Meantime, the story Armstrong is peddling that he had no desire to sell AOL into a larger company but was swayed by a deeper understanding of Verizon's scale is absurd. For years, there have been reports of him trying to sell. He’s a dealmaker and his company was struggling to grow. That’s what they do.

Let's call this deal what it was: A company lead by a dealmaking CEO who surfed into this job after his success at Google, looking to prove he could be more than that, and who wanted to sell and finally found a buyer who'd give him a face-saving price to reward him for the one gamble he made that paid off. That gamble: A series of small acquisitions that created a big programmatic video ad selling platform. Meanwhile, so many other of Armstrong's gambles have failed.

Sure, the deal price represents a more than doubling of shareholder value since the AOL “turnaround” began. But Armstrong has had his fair share of embarrassments. He bought two mega media personalities in TechCrunch's Michael Arrington and Huffington Post's Arianna Huffington and utterly failed to manage that level of interpersonal volatility. Arrington left. Then came back. And the two settled on paying him shit loads of money to sit on stage at TechCrunch’s conference but have little to no other involvement. (Disclosure: I was at TechCrunch at the time and staunchly opposed to selling. I later left to start Pando, because of AOL's handling of the asset.)

Meantime, all of the Huffington Post braintrust left-- except Arianna-- to build Buzzfeed and other media companies. Buzzfeed—the company that's dominated the social distribution news game the way that team once dominated the SEO news game at HuffPo. Buzzfeed co-founder and viral wunderkind Jonah Peretti reportedly offered to stay for a bit and help AOL with the transition but Armstrong wasn't interested. He didn't even understand what-- or more to the case who-- had helped make HuffPo into such a valuable asset.

Need more proof Armstrong didn’t understand the content business? There was that email about the "AOL way" where the company advised putting Google friendly words into headlines like "Lady Gaga Pantsless in Paris." He was trying to catch up at the old game of gaming traffic while Buzzfeed and others were moving the ball dramatically forward. (Meantime, the flood of AOL homepage traffic aged Huffington Post's once-desirable readership demo faster than the end of Dorian Gray.)

But he’s a great leader right? Sure! Unless you count the time he callously complained about the healthcare costs of saving the lives of two of his employees’ kids.

Or the time he fired "Abel" on a conference call in front of 1,000 employees.

Or the massive investment in Patch-- which was finally offloaded unceremoniously to an investment firm after years of justifications by Armstrong. Remember Patch? The local news company co-founded by… Tim Armstrong. It lost $35 million in 2012 alone.

Or how about that crazy quilt of acqui-hires like, which he did nothing with and then sold back to the entrepreneurs?

Tim Armstrong, ladies and gentlemen: A Great Leader.

AOL does roughly $600 million a year in ad revenues-- out of total annual revenues of $2.5 billion. So it can’t be denied that Armstrong runs a sizable media company. But given the massive home page traffic he -- and all of AOL's sites – inherited in the late 1990s, the hundreds of millions he spent on acquisitions, all that cash he still got from people on dial up, and the fact that the company was growing at anemic single digit growth rates, it's hard to argue he is selling AOL from a position of strength. Even with all those advantages, he's struggled to grow ad sales at those properties. In the wake of the mere announcement of the deal, AOL has already taken a hatchet through its bloated, ineffectual sales force, laying off hundreds. His biggest win Wall Street-wise was trading a giant bucket of patents for a wheelbarrow of cash.

Of course Armstrong wanted AOL to stay independent forever. Why wouldn’t he when the company was doing so well?

AOL’s explanation for the deal makes so little sense that, at times, you feel like their press announcement might have been drafted by Lewis Carrol:

“The bundling of Verizon and AOL creates a powerful platform for the unbundling of media.”

That quote, by the way, came courtesy a BusinessInsider listicle entitled: “Here are five reasons selling to Verizon makes sense.” In it, BI’s Jay Yarrow lays out AOL’s various explanations for why the sale makes total sense. Let's look at the recycled rationale:

“The combination of Verizon and AOL brings us to the scale of Facebook and Google: Verizon touches 70% of Internet traffic across 1.5 billion PCs, TVs, and mobile devices.”
Classic Armstrong. It isn’t technically wrong, and it sounds good, unless you know a single thing about the tech business. Facebook and Google are powerful advertising companies because they each have a totally unique asset that connects the world and information primarily that anyone in the ad game has to be part of. That’s why the companies are so valuable. It’s not because a high percent of Internet traffic is “touched” by these companies. (What does that verb mean? Can the Internet show us on a doll where Verizon touches it?) A combined Verizon/AOL is nowhere close in terms of scale that actually matters in the ad business.

Google owns search. Facebook owns social and increasingly mobile messaging. What does Verizon/AOL own? The most distinctive thing to AOL was the Huffington Post, which may be spun off in this deal. So this isn’t a play to get into content—what AOL’s whole turn around was supposed to be about. And per the Wall Street Journal, the entire reason Verizon is chasing this “mobile video” chimera is because their core business is getting commoditized. You don’t put two companies struggling in their core businesses together and think you’ve got a Google killer.

You know who is actually a leader in mobile video? YouTube—owned by Google-- and Facebook. Sure, Comscore says AOL is in third place in video ad sales. But it's nearly all programmatic, in other words, not happening on their own sites. That's not value-less but nowhere near the same asset as the video reach of Google and Facebook. Verizon has just bought a technology platform. That's why HuffPo, much of the sales team, and nearly anything else can probably go.

“The combination of Verizon and AOL creates a powerful force in mobile, video, social and programmatic platforms.”
What social asset does AOL own? Are they talking about Bebo? Can’t be. They sold that one back too. Instant messenger? Lucky Verizon! “Platforms” is the key here—as evidenced by the pink slipped sales team.
“Verizon leads in mobile and mobile video, and AOL leads in video & programmatic advertising. The combination creates the first & most powerful media technology company on the planet.”
The “first and most powerful media technology company on the planet”? What do those words even mean? Google and Facebook exist, and I thought this deal meant you were approaching their level, so wouldn’t they be first and also bigger? And how about all the other media technology companies on the planet? Netflix? Bloomberg? The New York Times? The BBC? Comcast? TimeWarner? I have to believe AOL has at least heard of that last one.

And AOL is hardly leading in anything ad related—it was growing revenues at less than 10% a year and ad sales are only one-third of AOL’s revenues. Verizon likewise hardly leads in “mobile video”—the stated reason they say they’re doing this deal is to augment their mobile streaming video service which launches next month. AOL mostly just gives them a platform to sell ads across it. Woo hoo! That's why it was done at just 8.3 times next year's expected earnings in an era of high priced deals.

Sure, Verizon does lead in mobile if you mean providing connectivity service. But how exactly does that combine with AOL's assets to compete with Facebook and Google?

“The bundling of Verizon and AOL creates a powerful platform for the unbundling of media.”
Ok, Jabberwocky. And Verizon-AOL is like a writing desk.
“AOL shareholders have more than doubled their investment value during AOL’s turnaround, and now Verizon and AOL will double the size of the mobile video/TV market.”
The fact that shareholders have gotten some value means Armstrong hasn’t failed on paper, but again, the biggest stock mover was him selling a gargantuan patent portfolio. As for the last line—it seems to suggest there’s a causal link between AOL’s returns for shareholders and the entirety of the mobile video/TV market.

Also, what is the “mobile video/TV market?” Streaming television programming over phones? So now they are taking on Apple too? And how exactly would AOL and Verizon joining forces cause the entire thing to “double”? It’s jibberish, wrapped inside a press release, aggregated by Business Insider.

Business Insider later wrote that AOL is indeed such a plum asset that a bidding war might erupt driving the price higher..... but it cited anonymous, speculative sources who said the big untapped value could be selling things like HuffPo off. Not so much, AOL's superpowers that suddenly double global markets and create new Googles and Apples overnight.

Handed the news peg, the financial press is making joke after joke about the crazy old AOL/Time Warner deal of the bubble years today. So I dug through our PandoMonthly archives to find Steve Case’s justification of that deal. It’s often called the worst acquisition in tech history. But at least the vision made some sort of sense.

Here’s the video:

[illustration by Brad Jonas]