AOL to Buy Advertising.com for $435M

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AOL agreed yesterday to acquire performance-based ad network Advertising.com for $435 million in cash in a bid to capitalize on the strong growth in online direct response advertising.


The deal brings to AOL optimization technology for offering direct response advertising on its own sites and a third-party network that runs ads on sites across the Internet.


Advertising.com buys inventory from Web publishers on an impression basis and sells it to advertisers with cost-per-action or cost-per-click pricing. It also buys ads from e-mail marketers and search engines on a cost-per-click basis. It then runs ads across the network of sites, making money from the difference it charges advertisers and price it pays publishers for their inventory.


Advertising.com chooses which ads to show through its AdLearn technology, which gauges past campaign success rates and adjusts placements to maximize returns. The more campaigns AdLearn runs, the more data it has to optimize campaigns.


"We believe this technology will give us a leading position for some time to come in the pay-for-performance sector," AOL chairman/CEO Jonathan Miller said in a conference call.


Performance-based ad campaigns online, which can be on a cost-per-click, cost-per-action or cost-per-conversion basis, have grown substantially. According to the Interactive Advertising Bureau, performance-based Internet ad spending rose from 21 percent of online ad spending in 2002 to 37 percent in 2003. Search marketing powered much of that growth.


Unlike Yahoo and Google, however, AOL does not sell search advertising, instead relying on Google for its paid search. In the fourth quarter, the Google relationship accounted for one-third of AOL's ad sales.


"Direct response is a hot topic right now," Jupiter Research analyst Nate Elliott said. "AOL chose to sit out the search wars." Elliott said Advertising.com would let AOL offer direct response advertising without owning a search business.


AOL executives said they were committed to maintaining Advertising.com's ad network.


"In a growing market, you want to have as diverse a suite of offerings as you can," said Michael Kelly, president of AOL Media Networks.


AOL hopes the acquisition, its first major deal since the Time Warner merger, marks a turning point for its business, which is just now recovering from the dot-com meltdown. AOL's ad business has grown the past two quarters, after quarterly declines stretching back to 2000.


Advertising.com's ad network has 1,500 publishers and 800 advertisers. Combined, AOL said its own network and Advertising.com's would reach 140 million Internet users.


The acquisition would scuttle Advertising.com's planned $100 million stock offering. Advertising.com, founded in 1998, had $12.1 million in operating income in 2003 on $132.3 million in sales. The company filed for an IPO in April.


"It really came down to how can we become bigger, faster," said Advertising.com CEO Scott Ferber, whose 18.9 percent stake in the company will net him $82.2 million. He will stay with the company, according to an Advertising.com representative.


Advertising.com, Baltimore, will operate as a separate company in the AOL Media Networks unit. Advertising.com has 300 employees and offices in six European countries. The deal is to close this summer.


The acquisition brings AOL new tracking capabilities, thanks to Advertising.com's use of cookies to track Web surfers in order to serve them the most relevant ad. The cookies record users' Internet protocol addresses, the pages they viewed on the network and which ads they saw and clicked. Advertising.com aggregates the data across the network, letting it target audiences based on geography and demographics. It does not collect personally identifiable information.


"It really is the Holy Grail of what marketers have been looking for," said Ted Leonsis, AOL vice chairman. The deal will not affect AOL's privacy policies, he said.


The success of Advertising.com's arbitrage method has drawn competitors. In March, online ad company aQuantive launched Drive, a unit that buys advertising on an impression basis and sells it to advertisers tied to conversions. Drive uses data from aQuantive's Atlas DMT ad server to optimize ad placements. Advertising.com also competes with 24/7 Real Media and ValueClick, both of which offer performance-based advertising that runs across a network of Web sites.


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