Wall Street Split Over AOL's Acquisition of Huffington Post

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The current issue of The Hollywood Reporter magazine looks at the wisdom of the $315 million deal, as the company's stock dropped after the announcement.

The following article appears in the deals section of The Hollywood Reporter magazine on newsstands Thursday

AOL’S $315 million acquisition oF the Huffington Post isn’t quite on the scale of a merger with Yahoo, as many had speculated was in the cards, but the Feb. 7 deal is the biggest move chairman and CEO Tim Armstrong has made since taking over in 2009.

Wall Street, however, is split on the wisdom of the deal, which happened after only weeks of talks and was signed while Armstrong and Arianna Huffington -- who co-founded HuffPo with Ken Lerer -- attended the Super Bowl together. AOL’s stock was down as much as 4 percent early Feb. 8, the day after, before recovering slightly, and some observers believe the deal could be Armstrong’s version -- albeit on a much smaller scal -- of the much-maligned 2000 AOL-Time Warner merger.

Skeptics also cite other failed AOL acquisitions including the $850 million buy of social network Bebo, which was sold for less than $10 million last year. “This is not a take-over-Yahoo Hail Mary pass,” Miller Tabak analyst David Joyce says of the HuffPo deal, “but judging by the stock’s reaction, it is possibly some people’s definition of a Hail Mary.”

The price is about 10 times HuffPo’s expected 2012 operating income before depreciation and amortization, assuming the company hits financial marks that management predicts. Indeed, former NBC Universal topper Jeff Zucker tried to buy HuffPo but balked at the price. “Still, HuffPo should grow 200 percent from 2011 to 2012, while those conglomerates are growing perhaps 10 to 12 percent,” Joyce says in defense of the price tag.

Key decisions have yet to be made, but Huffington and Lerer will get big payouts, and she will assume control of a broad swath of AOL digital media properties; specific consolidation and layoffs plans have not been determined.

Needham & Co. analyst Laura Martin is more bullish than many and has a “buy” rating on AOL. “What this gives Tim is critical mass in premium branded content with 117 million uniques,” she says. “You can get a lot of money from branded advertisers if you have a safe environment that is only premium content.”

Plus, Armstrong is buying the big media brand and voice that AOL has lacked. “I think they will really get along great,” Martin says. “She is going to run his content arm, and he is going to do the ad sales side.”