Google Near Deal to Buy AOL Stake

Google Inc. plans to invest $1 billion in Time Warner Inc.’s America Online in a deal that would deepen the ties between two Internet advertising giants and leave rival suitor Microsoft Corp. out in the cold.

After months of much-publicized negotiations with both companies, Time Warner Chief Executive Richard Parsons called Microsoft CEO Steve Ballmer on Friday morning to say he had agreed to a tentative deal in which longtime partner Google will acquire a 5% stake in AOL. Time Warner’s board is expected to vote on the agreement Tuesday.

“Google pays a $1-billion premium for an insurance policy that ensures domination of a very valuable part of the Internet economy,” said Jordan Rohan, an analyst with RBC Capital Markets.

Google’s shares rose $7.62 to a record $430.15 on reports of the tentative deal. Time Warner gained 16 cents to $18 and Microsoft fell 2 cents to $26.90.

Spokespeople for the three companies declined to comment.

But details were confirmed by four executives who spoke on condition of anonymity because the deal still had some loose ends.

Seeking a foothold for its fledgling search-engine technology, Microsoft waged a nearly yearlong effort to replace Google as the provider of ads for AOL Search.

Microsoft and Time Warner discussed a variety of options, including a joint venture combining elements of their Internet operations and Microsoft taking a minority stake in AOL.

But when word of Microsoft’s overtures leaked in September, Google began fighting to keep AOL, its largest source of advertising revenue.

About 11% of Google’s $2.64 billion in revenue in the first half of this year came from AOL Search ads.

Google made key concessions.

The Mountain View, Calif.-based Web search giant has developed a vast following by presenting simple search results and refusing to continually bombard its users with promotions.

Now, in a first for the company, its negotiators agreed to promote AOL’s services on its websites.

For example, Google.com searches for “Madonna” may return not only the standard ranking of relevant Web pages, but also, on the side of the page, a picture of the singer with links to AOL services featuring her songs and news about her.

Google also commissioned AOL to sell non-search ads to Google’s advertising partners.

Ninety-nine percent of Google’s revenue comes from simple text ads that generate money only when someone clicks on them.

But the company is beginning to offer its advertising partners flashing banners and other traditional Internet ads -- the kind AOL has sold for a decade.

Martin Pyykkonen, an analyst with Hoefer & Arnett, said the arrangement could help Google alleviate one of Wall Street’s few concerns about the company: whether its reliance on one revenue source leaves it vulnerable to slowdowns or growing competition in search-engine ads.

The $20-billion market value for AOL implied by Google’s investment could also relieve some of the pressure on Parsons and his management team. Dissident shareholder Carl Icahn has zeroed in on Time Warner’s ill-fated 2001 marriage to AOL as a chief reason why the company should be split up, something AOL co-founder Steve Case recently endorsed.

AOL’s shrinking dial-up Internet access business has dragged on Time Warner’s stock, but analysts said the valuation suggested that AOL’s efforts to attract audiences and advertisers through free services are making progress.

“AOL’s relevance on the Internet was highly questionable to investors 12 to 18 months ago,” said Rob Sanderson, media analyst with American Technology Research. “Now it’s definitely moving in the right direction.”

For Google, in addition to keeping an important source of revenue, the company gets to put AOL’s treasure trove of video clips into its own search engine.

Parsons and Google CEO Eric Schmidt shook hands on the deal in Time Warner’s New York headquarters around 9 p.m. Thursday.

The deal, if approved by the Time Warner board, would expand the two companies’ ad partnership into 2011.

Time Warner’s choice dealt a setback to Microsoft, the Redmond, Wash.-based software giant that has worked feverishly to build technology for Web searches and search ads, but hasn’t dented Google’s sizable lead.

Microsoft had hoped that an AOL alliance would also help it better compete with Sunnyvale-based Yahoo Inc., another leader in online search and advertising.

AOL would have given Microsoft’s efforts a “jump start,” Pacific Growth Equities analyst Derek Brown said.

Now, Microsoft is playing catch-up again.