AOL to be sput out; worth $3 bln to $4 bln?

More importantly, will the spin-out mean more M&A?

It's a go. AOL will officially be spun out as a separately-traded public company later this year, giving CEO Tim Armstrong flexibility to grow the business and make massive changes. 

"We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company," according to a press release from Time Warner Thursday.

It's not a surprising end to what's been considered a failed merger of Time Warner and AOL back in 2000.

Even back in 2005, one of my readers (Jack Kupransky), while I was a columnist at Dow Jones MarketWatch, commented to one of my AOL stories. The comment was this: "I think the *right* answer is for Time Warner to spin off AOL as an independent business (again)."

Why the merger failed is a long story that would probably have a number of people pointing fingers and blaming others for poor execution. If you want to know, however, here's an excellent piece about what went wrong by Larry Kramer. 

What's also important, at least to investors today is, "What's AOL worth?" And, for startups and those in the venture community, does independence mean AOL will focus more on mergers and acquisitions?

Based on current market multiples, Imran Khan, analyst at JP Morgan, believes AOL is worth about $3 billion to $4 billion.

Additionally, Khan says this: "Past acquisitions appeared to lack focus, as the management appeared to be chasing 'the next big thing.' We expect that Mr. Armstrong’s understanding of global Internet trends should result in a more deliberate M&A effort."

Here's the release:

Time Warner Inc. Announces Plan to Separate AOL
May 28, 2009

NEW YORK – Time Warner Inc. (NYSE:TWX) today announced that its Board of Directors has authorized management to proceed with plans for the complete legal and structural separation of AOL from Time Warner. Following the proposed transaction, AOL would be an independent, publicly traded company.

Time Warner Chairman and Chief Executive Officer Jeff Bewkes said: “We believe that a separation will be the best outcome for both Time Warner and AOL. The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content businesses. The separation will also provide both companies with greater operational and strategic flexibility. We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company.”

After the proposed separation is complete, AOL will compete as a standalone company – focused on growing its Web brands and services, which currently reach more than 107 million domestic unique visitors a month, as well as its advertising business, which operates the leading online display network that reaches more than 91% of the domestic online audience. AOL will also continue to operate one of the largest Internet access subscription services in the U.S.

AOL Chairman and Chief Executive Officer Tim Armstrong said:  “This will be a great opportunity for AOL, our employees and our partners.  Becoming a standalone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options. We play in a very competitive landscape and will be using our new status to retain and attract top talent. Although we have a tremendous amount of work to do, we have a global brand, a committed team of people, and a passion for the future of the Web.”

Today, Time Warner owns 95% of AOL, and Google holds the remaining 5%. As part of a prior arrangement, Time Warner expects to purchase Google’s 5% stake in AOL in the third quarter of 2009. After repurchasing this stake, Time Warner will own 100% of AOL. Accordingly, once the proposed separation is completed, Time Warner shareholders will own all of the outstanding interests in AOL.

The proposed transaction will be structured as tax-free to Time Warner stockholders. The transaction is contingent on the satisfaction of a number of conditions, including completion of the review process by the Securities and Exchange Commission of required filings under applicable securities regulations and the final approval of transaction terms by Time Warner’s Board of Directors. Time Warner aims to complete the proposed transaction around the end of the year.

(Image source: IAB.net)