Google to buy 5% stake in AOL for $1 billion

Google, the undisputed king of search engines, has managed to retain one of its biggest customers, AOL, from joining hands with one its biggest competitors Microsoft. Google has won its bid to buy 5 percent of America Online from Time Warner for $1 billion, a deal that has shut out Microsoft. This comes as a big blow to Microsoft, as it had been relying on AOL to kick-start its own AdCenter ad brokerage and give the MSN Search engine a boost.

The sale, though, is still to be approved by the Time Warner board at a meeting on Tuesday.

Currently, Google provides AOL with search technology. The partnership is set to end next year, but if the deal does go through (subject to the approval of Time Warner Board), it will continue for another five years. In other words, even as Microsoft launches its biggest assault ever on search, Google will have managed to defend its biggest customer, AOL, for the next six years. The two will also deepen their advertising relationship. AOL will sell advertising for Google’s search results on AOL’s sites.

For Google, last year, more than 12% of its $1.03 billion revenue, most of which came from online advertisements revenue through AdSense, its advertising program, came from AOL. This is possibly why Microsoft targeted AOL earlier this year, trying to convince it to switch to MSN’s search technology.

"If you’re large and successful, you don’t want to lose your biggest customer to your biggest competitor," said Scott Kessler, an analyst with Standard & Poor’s. "Next year will be a big year for Microsoft and search. Really, the last thing Google wanted to see was its biggest customer bolting to its biggest competitor’s new offering."

Although, in what can be termed as a clash of the web-titans Google did manage to get an edge over Microsoft, it has not been all that easy for the company. It is believed that Time Warner, AOL’s parent company agreed to the Google deal only after it agreed to give AOL preferred ranking in searches.

According to a release in the Wall Street Journal, Google will promote AOL web properties and include AOL’s online videos "amongst the search results"
However, it is being speculated that ’Amongst’ may mean ’as part of’, or it may mean ’along side’ and incase it does mean ’as a part of’ it may prove to be a big blow to Google which claims to be a purist when it comes to search results.

Billionaire financier Carl Icahn has disapproved of the apparent sell-out, as according to him, if Google does take a stake in AOL at the proposed valuation, it would imply that AOL is worth $20 billion, or approximately 25 percent of Time Warner’s current market value.

Analysts also believe that it doesn’t make complete financial sense for Google either and more than anything shows that Google is insecure when it comes to Microsoft. This is because it would take Google as much as four years to recover $1 billion from AOL.

The markets welcomed this development and reacted accordingly, as the shares of Time Warner rose by $0.16 to $18.00 at the close of trading Friday, while shares of Google climbed up $7.62 to $430.15, and shares of Microsoft though, dipped $0.02.