Armstrong looking to boost content

For most of his short tenure as AOL’s topper, Tim Armstrong has remained steadfastly on point: His mission is to create the premier digital content company. Yet the dozens of partnerships and acquisitions he’s packed into less than two years have done little so far to give AOL much-needed traction with traffic and advertisers, as it continues to bleed subscribers.

So Armstrong raised the stakes, announcing the surprising news just after midnight on Monday from Dallas, where he was schmoozing advertisers at the Super Bowl, that AOL was buying the Huffington Post for $315 million. He is hoping the news and aggregation site co-founded by Arianna Huffington will be the catalyst AOL needs.

The acquisition, one investment banker not involved with the transaction said, “really is a bet-the-farm move.”

Armstrong has repeatedly said that his efforts are not a one year-turnaround story, but at the same time, it is not a five-year mission either. The clock is ticking because Armstrong needs to secure big gains in ad dollars as subscription revenues continue to disappear at AOL.

“We believe (the Huffington Post) deal is a score for AOL,” Armstrong said Monday morning in a conference call. “It will add significant acceleration to our company, our strategy and shareholder returns.” He said he’s excited about having global, national and hyperlocal content on the same platform and that a combination of the two companies will attract even more big brand marketers.

Armstrong’s dealmaking, while previously not on the scale of HuffPo, has been prolific. Acquisitions at AOL since the former Google exec took over as CEO in April 2009 have included hometown news venture Patch, website TechCrunch, social software startup Things Labs and video syndicator 5min Media. Partnerships have ranged from deals with TV studio Endemol (“Big Brother,” “Extreme Makeover”) and news outlets including the Sporting News to celebrities such as Marlo Thomas, Ellen DeGeneres, Heidi Klum, Adam Carolla, Kevin Pollak and Kevin Smith.

But the Huffington Post acquisition marks the first significant attempt to gain scale.

AOL will pay $300 million in cash for the HuffPo, the rest in stock in the form of AOL options for HuffPo employees. The Huffington Post, founded in 2005, is privately owned by co-founders Huffington and former AOL exec Kenneth Lerer and a group of investors.

Huffington will become prexy-CEO of the newly created Huffington Post Media Group, overseeing AOL’s news and content operations. The plan is to integrate AOL’s existing content with Huffington Post’s various sections. The partners said the combined entity would have a base of 117 million unique users per month in the U.S. and 270 million around the world.

Huffington said Monday: “It was like stepping off a fast train and onto a supersonic jet. … It is amazing how aligned (the two companies) are. It’s just a perfect fit.”

She said she has no plans to leave the company. “I told Tim I want to stay forever,” she said. “I want this to be the last act of my life.”

Execs said they expect the deal to close at end of the first quarter or the start of the second quarter, with Armstrong adding that he expects the HuffPo to be fully integrated over the next 45 days. “This will have the smallest disruption for the size of any transaction that I’ve worked on,” he said.

After initial discussions between Armstrong and Huffington in November, the deal came together in the past month. Final deal terms were hammered out over the weekend as Armstrong and Huffington made the rounds at the Super Bowl in Dallas.

AOL chief financial officer Arthur Minson said the deal would allow for $20 million in annual cost savings. He added that he expects the HuffPo to generate $50 million in revenues this year and $10 million in operating profits. “We believe it will be at a $100 million revenue run-rate in the next 12 months and operating in the 30% margin range,” he said. “Even on a standalone basis, we think this is a very good deal for us financially.”

However, the compensation being paid to retain talent from all its deals, about $40 million in 2011, will strain AOL’s operating profits for the year, Minson said. AOL will most likely take a $30 million restructuring charge this year, Minson said.

He predicted that the company would again see growth in operating profits in 2012.

In the quarter ended Dec. 31, AOL reported that revenues dropped 26% to $2.4 billion, as AOL continued to lose subscribers and ad dollars. The company, spun off from Time Warner in 2009, posted a net loss of $782 million for the year vs. a profit of $249 million the year before. Shares on Monday closed down 4¢ to $21.15. The stock is down roughly 7% in the past 12 months.

“You will see the contribution from the Huffington Post and other recent acquisitions, which we expect will accelerate the pace of our turnaround,” Minson said.

Huffington Post bowed at the height of the George W. Bush presidency as a liberal antidote to the plethora of conservative voices online. The site has drawn an array of high-profile contributors from politics, entertainment and media over the years. Huffington Post is averaging 25 million unique users a month, according to AOL. Its aud is growing at a rate of 22% — a growth curve AOL hopes to accelerate when it integrates with AOL’s video and content platforms. Among other initiatives, AOL has been investing in its Patch network of targeted local news sites, which will be a natural fit with Huffington Post’s news pages.

(Cynthia Littleton contributed to this report.)

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