There are two key questions about today’s $315 million AOL-Huffington Post deal:1) Why did it happen?
2) Will it work?
The first one’s easy.
Let’s look at it from both companies’ perspectives.
WHY HUFFPO DID THE DEAL
If you’re Huffington Post, this is $300 million in cash after 6 years of work, which ain’t bad no matter how you look at it. Importantly, it’s $300 million of CASH, not stock, so even if AOL goes on to destroy the company, Huffington Post’s shareholders will have made out well.
For Huffington Post, the alternative to doing this deal would have been waiting for a better offer or raising more money and preparing for an IPO.
The latter would have taken a couple of years (IPOs take an insanely long time these days), and there would be no guarantee that the IPO market would be there when you wanted it. The economy could crater, the stock market could tank, etc., and you wouldn’t even be able to cash out completely on the IPO.
So, for Huffpo shareholders, the calculation was $300 million of cash now or much less cash plus a lot of stock in a possibly public company in a couple of years. Unless Huffington Post was nearly guaranteed to be worth $1+ billion as a public company someday, the $300 million of cash now is mighty enticing.
As to waiting for a better offer… Huffpo has talked to NBC and Yahoo in the past 6 months. NBC, presumably, wouldn’t have gotten anywhere near this price. Yahoo, apparently, was moving at a glacial pace. So when this offer materialised, Huffpo reportedly didn’t even bother to check back with either of these two potential buyers, or any others for that matter.
If you’re Huffpo’s key decision-maker Arianna Huffington, meanwhile, you now get to rule the huge AOL content roost–an opportunity that Arianna almost certainly would not have had with Yahoo, NBC, or any other acquirer. You also get reloaded with AOL stock after selling your Huffpo stock, so the transaction is riskless for you. And if the deal doesn’t work or you don’t like AOL or get bored or whatever, you can leave.WHY AOL DID THE DEAL
From AOL‘s perspective, this is a Hail-Mary pass.
Importantly, however, it’s a pass AOL should ABSOLUTELY be throwing at this point in the game. To not throw this pass would mean just giving up and quitting.
AOL’s traditional business is dying. If it does nothing, it will get sacked deep in its own territory, and the game will end.
Unlike many companies, moreover, AOL still has a major weapon– a big pile of cash, and it can use the cash to make big bets like this. And unless it simply wants to break itself up and hand the resulting cash back to shareholders, this is exactly the sort of bet it should be making.
AOL wants to build a huge new content business. But AOL’s main brand is tired and meaningless and the rest of the company’s brands are tiny niche plays.
Huffington Post, meanwhile, has emerged as a major mainstream news brand, albeit one that is identified with liberal politics (which will be an issue here–AOL has now aligned itself with the NBC-MSNBC side of the aisle as opposed to the FOX side, and some of AOL’s users will hate that). If the deal goes well, AOL will be able to use the Huffington Post brand as its premiere brand.
Assuming Huffington Post hits its numbers (a big “if”), the deal should also be accretive relatively rapidly. $300 million is 30X this year’s projected EBITDA but perhaps only 15X next year’s. If AOL continues to build the brand, in other words, the deal could ultimately work out well financially.
So it’s a smart, bold bet, and AOL deserves kudos for having the balls to make it.
AND THE NEXT QUESTION…WILL IT WORK?
Here, we need to return to the Hail Mary analogy…
The pass has been thrown, the ball is in the air, and the receiver and a defender are streaking down the sideline with their arms outstretched. It was a smart pass to throw, and it appears to have been well thrown, but that’s no guarantee the receiver will catch it.
What could go wrong with this deal?
A half-dozen things.
* AOL could blow the integration. Huffpo’s sales head, Greg Coleman, has already announced that he’s quitting, and AOL will have to mesh its sales force and Huffpo’s without screwing up Huffpo’s revenue or alienating one sales team or the other. Both sales forces call on the same accounts, so this will be no easy trick. The same can be said for technology and content integration, neither of which will be simple. (Which of AOL’s “towns” will Arianna control? Will AOLers like working for her? Etc.)
* AOL could blow the overall content strategy. So now AOL has a major general news brand (Huffpo) and lots of smaller focused brands (Engadget, TechCrunch, Patch, etc). How will it integrate them? How will it staff them? How will it budget for them? How will it SELL them to advertisers? These are key questions that will matter to the folks who have to actually work for AOL and keep making great content going forward. They will be VERY easy to screw up.
* The key people could get bored and leave. Always a risk. It’s even harder to imagine Mike Arrington sticking around for the rest of his three years, for example, now that he has been completely overshadowed by Arianna.
And then there’s the final issue.
Even if AOL can manage all these challenges, it will have completed a nice pass, but it still won’t have won the game. Winning the game will require many more executional wins, with ever-lower profit margins and cash flow to work with as the search and access businesses gradually die.
But still… a chance of winning a game is better than no chance of winning. And AOL is giving itself that chance.
So kudos to AOL for a smart, bold bet.
Disclosure: Huffpo’s founder/chairman Ken Lerer is an investor in Business Insider.