AOL Buys Advertising.com Amid Uptick in Ad Business

NEW YORK – AOL has agreed to buy online marketing firm Advertising.com for $435 million as the world's largest Internet service provider tries to beef up its ad business to better compete with Google and Yahoo (YHOO).

America Online said the all-cash transaction -- its first major acquisition since the merger of AOL and Time Warner -- will give it the largest Internet ad network, allowing it to better capitalize on the expected uptick in online advertising this year.

Internet advertising has emerged as the fastest-growing ad segment following a three-year downturn that began in mid-2000. Media buyer Universal McCann has forecast online advertising will grow 20 percent this year to $6.78 billion.

"We will benefit from the incremental revenue from Advertising.com, as well as maximizing our own advertising inventory using their technology," AOL Chief Executive Jonathan Miller told reporters in a conference call.

The acquisition marks a change of course for AOL, a unit of Time Warner Inc. (TWX). The company has traditionally focused on its own Web properties, but Advertising.com creates ad campaigns that reach across the Web.

The deal "shows AOL needs to spend considerable amounts of cash to position the company for future growth opportunities, and that Time Warner management is willing to let them do that," said Mark May, analyst at Kaufman Bros.

AOL, which lost 2.2 million Internet-access subscribers in 2003, is de-emphasizing its traditional dial-up access business and focusing on advertising and charging for premium services such as virus protection, music downloads, and proprietary content.

The acquisition comes a month after Time Warner Chief Executive Richard Parsons (search) declared that AOL had been "stabilized" after years of subscriber losses and cost-cutting.

Miller said the deal was scrutinized by Time Warner management and "support was there when we asked."

AOL Vice Chairman Ted Leonsis said the company expects to generate $1 billion in annual revenue from advertising and from its partnership with online search engine Google. First-quarter ad revenue was $214 million as AOL recorded two consecutive quarters of online ad growth for the first time since 2000.

Advertising.com, which competes with ValueClick (VCLK) and 24/7 Real Media (TFSM), takes ads from Web sites, search engines and e-mail publishers and repackages them to create broad advertising campaigns across the Web.

The company reaches 110 million monthly users, or 70 percent of all U.S. Internet users, with ads that are targeted based on a variety of criteria. Advertising.com is paid based on the number of responses the campaigns generate, whether it's a registration, sales lead or click response.

"We charge our advertisers every time we deliver a customer," said Scott Ferber, CEO of Advertising.com.

The company, which had revenue of $130 million in 2003, will be managed as a separate entity reporting to Michael Kelly, AOL's head of advertising. It will remain based in Baltimore.

Advertising.com previously planned to file for an initial public stock offering.

"When we were approached by AOL, our board had the decision to pursue an IPO path or an acquisition by AOL," Ferber said. "Being a part of the largest media company in the world gives us the capacity to get bigger faster."

Time Warner shares were up 5 cents at $17.40 on the New York Stock Exchange (search).