Sure this sounds like an expensive buy at 32 times EBITDA but no one can say AOL is not doing enough to transform itself from a quickly waning core business model into an online media and entertainment hub.
This bold acquisition marks a risky bet to turn the company around with limited cash in hand. Have seen a similar bet by Xerox in buying ACS, most expensive in its history.
On the other hand, an old company like Kodak whose core business has almost evaporated in the last decade has yet to act swiftly to save itself from bankruptcy.
There are three kinds of companies: those who make things happen, those who watch things happen and those who wonder what happened.
AOL Inc will buy Arianna Huffington's influential website for $315 million, looking to the high-profile liberal pundit to rescue it from the dustbin of Internet history.
The move, announced Monday, comes at a hefty premium. AOL is estimated to be paying 32 times earnings before interest, taxes, depreciation and amortization for The Huffington Post, said Benchmark Co analyst Clayton Moran.
Similar content deals, such as Hellman & Friedman's acquisition of Internet Brands in September 2010, typically go for eight to 12 times earnings, said Moran.
"AOL just spent 40 percent of their cash for very little near-term return," said Moran.
AOL expects Huffington Post to generate around $10 million in profit before interest and taxes and see savings of around $20 million meaning it would be valued at around 10 times 2011 profits.
The Internet company's name is still a proxy for expensive mergers gone wrong following the unraveling of its $350 billion merger with Time Warner Inc in 2000. Once worth $163 billion, today AOL has a market capitalization of around $2.3 billion. Shares fell 3.4 percent to close at $21.19 on Monday.
AOL's management was eager to point out that there would be financial benefits from buying Huffington Post.
"One plus one will equal 11," AOL Chief Executive Tim Armstrong said in an interview with The New York Times.
Steve Case, the AOL executive who led the ill-fated Time Warner merger said on his Twitter account: "Really? That wasn't my experience." He later sent another tweet saying he was teasing Armstrong and Huffington and congratulated them.
Armstrong said that the deal represents an opportunity to shore up AOL's content area and that an acquisition, rather than a partnership, made more sense. "It boils down to our strategy of the Art of War," Armstrong said referencing the ancient Chinese book on military strategy revered by executives.
Huffington Post's co-founder Arianna Huffington, is often described as the doyenne of the liberal political commentary in the United States and is a regular fixture on the cable TV news circuit opining on political news of the day. She is easily recognizable for her distinct Greek accent and forthright left-of-center viewpoint.
"Tim's and my vision are so aligned it's a dramatic opportunity to accelerate what we do with Huffington Post," Huffington said in an interview with Reuters.
She will lead a newly formed The Huffington Post Media Group, which will integrate all Huffington Post and AOL content, as its president and editor-in-chief.
"I want to stay forever," Huffington told analysts on a conference call. "I want this to be my last act."
The deal also sees the return to AOL of Huffington Post's other co-founder, lead investor and chairman Ken Lerer. He had been an executive vice president of AOL Time Warner.
Huffington Post had been shopped around to other media companies as its backers had sought an exit.
Former NBC Universal CEO Jeff Zucker said at Harvard University on Monday that his company had considered buying the site.
"We tried for the last 18 months at NBC to buy the Huffington Post; we could never agree on price is why it never got done," Zucker said.
The acquisition of Huffington Post is the latest move by Armstrong to rescue AOL's dial-up Internet access business by turning it into a media and entertainment destination.
HUFFINGTON'S OUTLOOK
AOL suffered sharp declines in advertising sales and dial-up subscriptions in the fourth quarter of 2010, driving overall revenue down 26 percent.
About $300 million will be paid in cash in the purchase, which has been approved by the boards of directors of both companies and shareholders of The Huffington Post, though it still needs government approvals, AOL said.
The Huffington Post is expected to generate over $50 million in revenue for 2011 and at a $100 million run-rate for the next 12 months, with margins at around 30 percent, according to prepared remarks by AOL Chief Financial Officer Arthur Minson.
AOL is expected to incur about $30 million in cash restructuring charges from the deal, which is expected to be closed in the late first, or early second, quarter of 2011.
AOL executives said they forecast operating profit growth by 2013, in part because of the acquisition.
"It offers us an ability to accelerate our core strategy, (and) accelerate the advertising strategy," Armstrong said during a conference call.
The Huffington Post, started in 2005, has grown into one of the most heavily visited news websites in the United States.
"My New Year's resolution for 2011 was to take HuffPost to the next level -- not just incrementally, but exponentially," Huffington said in her blog.
She said Huffington Post decided early this year to expand into more local news coverage; launch international sections, starting with HuffPost Brazil; and increase original video content.
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