More on the Proposed AOL/Google Partnership

Years ago, I worked for a stock brokerage house. My office was next door to that of corporate finance--the division that brought new offerings to market and specialized in mergers and acquisitions. I often ate lunch with the guys from corporate finance. I can remember one of the more experienced men telling me that the terms of a deal were often dictated "by the one who had the most to lose."

Those words came back to me when I heard the Associated Press report that "Time Warner Inc. ended talks with Microsoft Corp. Friday and entered into exclusive negotiations with Google Inc. over a $1 billion investment and a broader advertising partnership with America Online" [AOL].

In previous blogs, I've referred to the fact that Google's biggest customer is AOL. Google has been AOL's search engine for the last three years. According to the AP, that partnership accounted for $420 million (approximately ten percent) of Google's revenue for the first nine months of 2005. When Microsoft started negotiations with Time Warner early this year, Google was threatened by the potential of losing its protected position as AOL's search engine. Ten percent of your revenue is a lot to lose.

Meanwhile, Time Warner has its own problems. On the one hand, they need to beef up their stock price because of dissatisfaction on the part of vocal investors like Carl Icahn. On the other hand, there are risks involved in switching their search engine to Microsoft. If MSN couldn't maintain the level of revenue Google's search engine brings in, the Time Warner stock price could slide. As recently as last week, the Wall Street Journal reported that Google was unwilling to offer a guaranteed amount of revenue.

Early on, speculation was that Time Warner wanted to sell a minority stake in AOL to one of its suitors. Last week, BusinessWeek Online reported that "Time Warner has decided that the legal, regulatory, and managerial obstacles of a partial sale would be too complex, and it prefers to strike a commercial agreement instead."

Now, the AP reports that Google expects to buy a five percent stake in AOL for their $1 billion investment. What a difference a week makes.

Remember--all this is still preliminary. Until the Time Warner board meets on Wednesday and approves the prospective five-year deal, nothing is final. The Washington Post reported this morning that the deal "would give struggling AOL millions of dollars in free advertising space on Google, and a cut of any additional ad revenue AOL generates for the search engine. Carl C. Icahn, a dissident Time Warner shareholder who wants AOL spun off entirely, called the deal a 'travesty.'"

Stay tuned for more.