Checking In on AOL's Turnaround

 | Aug 07, 2013 | 12:03 PM EDT  | Comments
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What a difference a year makes.

A year ago, AOL (AOL) CEO Tim Armstrong was fighting off an activist investor who said he'd done a terrible job. Now the stock is pushing $40, and the activists' arguments have long since been forgotten. Armstrong has done a solid job of turning the ship on a business that most had left for dead three years ago.

Wednesday morning, AOL announced another solid quarter in which earnings topped expectations. Armstrong also announced his biggest acquisition since he took over the company four years ago: AOL is paying $405 million for Adap.tv, the Israeli video-advertising company.

When Armstrong had been in the midst of the proxy contest as he attempted maintaining control of his company, he had to put all new acquisitions on hold. He had been making quite a few before that, buying out such businesses as The Huffington Post, TechCrunch, and Engadget.

Because of the many purchases, Armstrong has come under attack for being a wasteful spender on M&A. I think the record shows that he's been a smart buyer of companies, and that he's made AOL stronger for doing them. Armstrong has been a big believer in brands. That's why he bought TechCrunch and Engadget -- but he didn't spend big bucks on them. The Huffington Post, which AOL purchased for $300 million, had been Armstrong's biggest-ticket purchase until today. However, it would probably be worth 3x that now in a sale.

Armstrong has also made a bunch of smaller-ticket buys in the video and advertising-technology space, where Adap.tv also fits. Advertising.com has probably been his most unheralded buy, or perhaps it's 5min Media.

Shareholders' biggest complaints have been over Patch, the local news network. It only cost AOL $7 million, but the company has spent big for four years now trying to build it up into its own hyper-local brand. It's difficult to say how much money AOL has poured into it now in order to get the business to profitability. The company said it would spend $50 million in 2010 to get Patch going, so perhaps it has sunk $200 million into it to date.

On this morning's call, Armstrong said that one-third of AOL's current Patch sites are very strong. One-third are at breakeven, and one-third are money-losers. Look for those losers to be pruned before year-end.

I don't share Armstrong's optimism in Patch as a brand long-term. But, even if the worst-case scenario transpires and he writes the whole thing off, you still have to give him high marks for the purchases he's made and how he's continued to milk profit out of the dial-up business. Adap.tv, for its part, looks to be another wise investment in one of the fastest-growing parts of AOL's business -- premium video.

Armstrong deserves more recognition for the job he's done at AOL.

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