AOL-HuffPost: All the News That's Fit to Merge

| About: AOL Inc. (AOL)

AOL’s (NYSE:AOL) acquisition of The Huffington Post is a telling deal on many fronts, pointing to the consolidation of America’s so-called new and old news media in slowly improving economic times and the cashing out of entrepreneurs and early investors.

The $315 million cash and stock merger is a bid by AOL CEO Tim Armstrong for the journalistic credibility that he has been unable to build wildly acquiring smaller assets against declining revenues. AOL gets Arianna Huffington’s star quality and respectability.

It also is an admission by Huffington Post investors and Arianna Huffington, who will oversee all of AOL’s blog, hyper-local and vertical news universe, that they no longer can go it alone in a news industry that is on the verge of rapid consolidation.

Huffington Post was last publicly valued at $100 million in late 2008. Investors Ken Lerer helped to provide the $1 million that started the venture in 2005. The deal represents seven times nearly $70 million in annual revenues from an organization largely based on unpaid writing contributors. This lays the foundation for other online news media properties, in their infancy and at their max.

The economic reality is that there are too few eyeballs stretched across too many news-gathering organizations, none of which is making enough meaningful revenues from redistributed advertising or subscription fees.

This is just the beginning. Before the year is up, it would not be surprising to see Time Warner's (TWC) CNN align with either CBS News (NYSE:CBS) or ABC News, owned by The Walt Disney Co (NYSE:DIS). Neither of the broadcast networks has the cable and online scale Comcast’s (NASDAQ:CMCSA) NBC Universal has for news, or Fox’s (NASDAQ:NWS) loss leader stubbornness. CBS has not been able to monetize CNET any more than News Corp. knew what to do with MySpace.

The rollup of online news and information aggregators is inevitable in an effort to create substance and scale.

In the same way The Daily Beast swallowed Newsweek and that Bloomberg snatched Business Week at pathetically low prices, the news industry is seeking to redefine and rejuvenate its value and turf by combining traditional and new media brands.

For AOL, it is another unexpected turn in a twisted road that most notably stretches more than a decade since its disastrous union and eventual divorce from Time Warner that destroyed an estimated $250 billion in market capitalization,

While the mergers of this decade are decidedly less grandiose, they are no less strategic as they aim to reconstruct entire businesses bulldozed by the pervasive Internet, where anyone can be a news reporter and commentator.

But will the HuffPost combo work? Only if consumers weary from scouring the Web for lively, legitimate news and analysis find it a worthwhile convenience for which they may ultimately pay in order to provide an essential second revenue stream. Such is the pay wall of survival sought by the likes of Rupert Murdoch’s Wall Street Journal as well as The New York Times as the news industry struggles to carve out a place in the paid app and mobile interactive marketplace.

For AOL, the HuffPost merger is a way to remain independent for now, although the newly combined entity will surely prove attractive to bigger media players with lots of balance sheet cash and an appetite for content.

Still, there are no guarantees that bringing together 117 million unique domestic readers and expansive content will result in financial success. At some point, consumers will pay for quality over quantity. To that point, the Internet names such as MapQuest, Moviefone, Engadget and TechCrunch accumulated by AOL have failed to result in any measurable gains and must now be filtered by The Huffington Post. For its part, The Huffington Post risks alienating its mostly left-leaning readership—no small matter that Arianna addresses in her explanation of the deal today, calling it “a merger of visions.”

But for all of Armstrong’s vision, AOL is hardly a growth story. Its annual revenues declined 26% in 2010 from 2009, and its fourth quarter ad sales fell 29% from the prior year.

The HuffPost deal is ultimately a way for Armstrong to literally cash out using AOL’s $720 million in reserves, mostly from asset sales, and pursue his recently revealed expansion plan. By April, he wants AOL’s content division to increase from 33,000 to 55,000 stories per month, increase video stories from 4% to 70%, and have its stories reach 95% search engine optimization, according to Business Insider SAI.

While that is a numbers game—rather than a journalistic endeavor—many others are seeking to do the same as the advertising market stabilizes. In the meantime, as Business Insider SAI so bluntly put it, “AOL has enough cash left for another Huffington Post and Four TechCrunches.” Last fall, AOL acquired the tech blog TechCrunch for about $30 million.

The bottom line: If you can’t beat ‘em, join them and stop trying to reinvent the news wheel.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.