AOL to Acquire Online Video Ad Company for $405 Million

AOL chairman and CEO Tim Armstrong

UPDATED: The Internet company unveils its biggest acquisition under chairman and CEO Tim Armstrong as it reports improved second-quarter revenue.

AOL on Wednesday said it has agreed to acquire online video advertising company, whose software matches advertising buyers and sellers, for $405 million, its biggest deal under its current management team.

It also reported improved second-quarter revenue and underlying earnings.

The online company, led by chairman and CEO Tim Armstrong, said its quarterly earnings amounted to $28.5 million, compared with $970.8 million in the year-ago period. The comparison was impacted by a $1 billion patent deal with Microsoft in the year-ago period, which had boosted earnings in the second quarter of 2012 by $970 million. Excluding that impact, earnings were up year-over-year.

STORY: CEO Tim Armstrong, Arianna Huffington Reveal AOL’s Ambitious Hollywood Strategy

Operating profit of $51.9 million compared with $1.06 billion in the year-ago period, which had seen a $1.04 billion boost from the Microsoft patent deal. Quarterly revenue of $541 million compared with $531 million, marking an improvement of 2 percent. Advertising revenue rose 7 percent, including a 5 percent gain in display ads, and subscription revenue dropped only 5 percent. The results beat Wall Street expectations.

The acquisition is the biggest deal since Armstrong joined AOL. He had in 2011 acquired the Huffington Post for $315 million and has in recent quarters repeatedly emphasized the upside potential for online video.

"AOL takes a major step forward today with another quarter of growth and our agreement to acquire the video marketplace platform that will make AOL a clear global leader in the most important growth segment in our industry – online video," Armstrong said. "AOL continued to get leaner during the second quarter, while growing consumer traffic, growing all advertising revenue lines and improving our subscription trends."

Digital video advertising spending is expected to grow 41.4 percent to $4.09 billion in the U.S. this year, research firm eMarketer estimates.

The deal is expected to close in the third quarter. AOL will pay $322 million in cash and approximately $83 million in stock. Founded in 2007, Adap.TV is privately held. Its investors include Spark Capital, Redpoint Ventures and Gemini Israel Funds.

" is a leading and global unified programmatic video platform powering video advertising for brand advertisers, agencies, publishers and ad networks," AOL said in describing the deal benefits. "The combination of AOL and is expected to create the only global company with a full end-to-end solution and video stack for publishers and advertisers."

During an investor call, Armstrong lauded for having seen growth above the industry average and having strong talent and "meaningful" revenue. He said the addition of the company will help AOL in what he predicted would be a decade-long industry shift that will see tens of millions of ad dollars migrate from TV to the Internet.

Overall, he predicted that the deal would turn out to be a "very smart and well targeted use of our capital."

Asked how compares to other online video players, such as Tremor Video and YuMe, AOL CFO Karen Dykstra said they are ad networks, while is a technology platform that can scale further quickly.

Twitter: @georgszalai