America Online to Acquire Advertising.com in $435M Deal

America Online has agreed to acquire interactive marketing services firm Advertising.com for $435 million in cash, putting a halt to the smaller company’s plans for an IPO.

The move is somewhat reminiscent of Yahoo’s acquisition of Overture, in that it pairs an online publishing company with a marketing services firm. It allows AOL to deploy Advertising.com’s technology across its network, as Yahoo has done with Overture. It will also allow AOL, like Yahoo, to effectively sell inventory on other publishers’ sites.

The deal is also significant as AOL’s biggest acquisition since it joined with Time Warner, perhaps signaling that the division — and, by extension, Internet advertising — is beginning to gain more respect within the larger corporation.

“We intend to play big across the board in all the forms of Internet advertising,” said Jonathan Miller, chair and CEO of America Online. “This acquisition says that in no uncertain terms.”

Through the deal, AOL will be able to offer advertisers access to the largest third-party advertising network, as ranked by comScore Media Metrix. In April 2004, the Advertising.com network reached 106 million unique visitors, or 68 percent of the total Internet population, placing it second only to Yahoo in reach among ad-supported media properties, comScore said. AOL itself came in fourth in those rankings behind MSN, reaching 56 percent of Internet users.

“Advertising.com has built a profitable, scalable, and highly attractive business. This acquisition is a strategic move that will bolster AOL’s advertising business, building on the strides made in the past year,” Miller said.

Advertising.com revealed its financial position when filing for a $100 million IPO in April. Revenues in 2003 reached $132 million, resulting in a profit of $18.7 million. Interestingly, AOL could have profited from the IPO as an early investor in Advertising.com. The company participated in an early venture capital funding round, putting in $5 million in 2000. Advertising.com executives said the public offering was aimed at fueling growth, but it saw the acquisition as an opportunity to grow even more quickly.

“Being part of the largest media company in the world is a much bigger opportunity to get bigger faster,” said Scott Ferber, CEO of Advertising.com. “We couldn’t be more excited.”

The company’s focus has mostly been in the pay-for-performance space, an area that complements AOL’s strength in impression-based media. Pay for performance has become a larger component of the interactive advertising industry, largely because of search marketing’s success.

Advertising.com acts as a media arbitrageur, typically buying CPM inventory from Web sites, search engines, and email publishers and reselling that to its advertisers on a pay-for-performance basis. Along the way, it adds value with its proprietary AdLearn technology, which optimizes media buys based upon results.

AOL said it planned to use the AdLearn technology throughout the AOL network, initially for pay-for-performance inventory, but eventually perhaps for CPM-based inventory as well.

“Our technology is a yield management system which can be focused on any objective we can quantify,” said Ferber. “This includes branding, if it can be quantified and measured.”

Industry watchers were cautious about the impact of such a deployment, however. “I think the primary value AOL gets from this is revenue and profits,” said Nate Elliott, associate analyst for Jupiter Research, which shares a parent company with this publication. “I think there’s technology they could use, but they’ve always had trouble taking advantage of their assets.”

Though AOL, because of its sheer size, has always been a force in the online ad industry, the past few years have seen it struggle to recover from the dot-com crash. Through various management shakeups, the company has managed to grow ad revenue from $204 million in 4Q 2003 to $214 million in 1Q 20004.

Advertising.com will remain in Baltimore and will be managed as a separate company reporting to Michael J. Kelly, president of AOL Media Networks. The company has more than 300 employees and operates in the U.S. and six European countries.

The deal is expected to close in late summer, subject to regulatory approvals.