Google finally sold back its 5 percent stake in AOL to Time Warner. Originally valued at $1 billion in 2005, Google ended up getting back only $283 million, including some cash distributions. There goes roughly $700 million, but Google already took a writedown on the investment back in the fourth quarter when the whole world was going to pot and nobody really noticed.
Time Warner took back the shares in preparation for the eventual public spinoff of AOL. When Google initially bought the shares, it valued AOL at $20 billion. Based on the price Time Warner paid for the repurchase of the shares, AOL is now worth $5.7 billion. I’m sure by the time it actually goes public, new CEO Tim Armstrong and AOL’s bankers are going to be arguing that it is worth a lot more.
So did Google get hosed on this investment? Pretty much. But you have to remember that it was part of a larger search outsourcing deal which Google still makes money from today. AOL on its own commands a 3 percent search market share and as such is probably Google’s largest partner site. Even if Google didn’t make back its investment over the past four years, the search volume AOL provides itself is worth paying for. (Search is a volume game, the more search queries you can throw ads against, the better the ROI). So don’t feel too bad for Google. It was buying distribution which helped it maintain its overall market dominance.
Update: According to this preliminary IPO document AOL filed with the SEC, last year the Google search partnership generated $678 million in search advertising revenues for AOL, or 32 percent of its total advertising revenues. Assuming that AOL struck an advantageous revenue sharing deal with Google and gets to keep at least 80 percent, that would mean Google’s 20 percent brought it $170 million in revenues. Multiply that by five years (the deal expires in 2010), add in the $283 million it got back for the shares, and it comes out of the whole deal with $1.1 billion. This is all back-of-the-envelope, but it is not hard to see how Google basically broke even on its investment.