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Google's AOL Investment May Lead to '08 IPO

Posted by iTech - 2005-12-25

SAN FRANCISCO - Google Inc.'s $1 billion investment in America Online could lead to an IPO in 2008, giving the online search engine leader and AOL parent Time Warner Inc. an opportunity to capitalize on an Internet advertising boom that they hope to fuel through their partnership.

The possible timeline for an initial public offering by AOL emerged in a Friday filing with the Securities and Exchange Commission. The documents provide additional details about a deal announced earlier this week that extends the business ties that Google and AOL formed when they began working together in 2002.

Although Google will hold only a 5 percent stake in AOL, it retains the right to demand an IPO beginning in July 2008, according to the SEC documents. If Time Warner doesn't want to pursue an IPO then it could buy back Google's stake based on a fair market appraisal, the filing says.

Time Warner has been under pressure from a group of shareholders led by hedge fund investor Carl Icahn to lift its stock, which has fallen by 9 percent this year to continue a prolonged slide.

To help get the stock moving, AOL co-founder Steve Case said he proposed pursuing a spin-off three months before his October resignation from Time Warner's board of directors.

In an interview earlier this week, Time Warner Chairman Dick Parsons declined to discuss whether the Google investment might be paving AOL's path toward an IPO. He described the Google alliance as the best way to increase AOL's market value, which stands at $20 billion, based on the Google investment.

Google has had a golden touch since its own August 2004 IPO, raising investor hopes that it can help AOL become more valuable. Google's market value has increased from about $23 billion at the time of its IPO to $125 billion today.

AOL was among the biggest beneficiaries of Google's IPO. When the two companies first became business partners in 2002, Google awarded AOL stock warrants that were later converted into 7.4 million shares — a stake that Time Warner sold for $1.1 billion.

Google's shares fell $1.11 Friday to close at $430.93 on the Nasdaq Stock Market and Time Warner's shares dipped 2 cents to close at $17.68 on the New York Stock Exchange.

Under the new five-year deal announced earlier this week, AOL will now have the right to use Google's search technology on its own and also will receive a $300 million credit to advertise its content and services through Google's vast marketing network.

Google in turn is depending on AOL to sell more graphical ads to diversify the search engine beyond the text-based ads that generate most of its profits. Google also will be able to draw upon AOL's huge video library — a resource that could help boost traffic to its own Web site.

AOL's Internet-leading instant messaging service will become compatible with Google's 4-month-old service next year, but Google's users will have to register with AOL to gain access to the expanded network, according to Friday's filing.

While most analysts have applauded Google's investment in AOL, the response among some search engine users has been less enthusiastic.

Web logs, or blogs, are filled with comments expressing fears that Google will begin giving preferential treatment to AOL content in its search engine. Those concerns have been exacerbated by a provision of the deal requiring Google to help AOL make its material easier to index.

Marissa Mayer, Google's vice president of search products and user content, sought to reassure the search engine's users in a posting on the company's own blog.

"Business partnerships will never compromise the integrity or objectivity of our search results," Mayer wrote. "If a partner's page ranks high, it's because they have a good answer to your search, not because of their business relationship with us."



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