Google's AOL stake in distress

Google's investment in AOL has not been fruitful. In 2005, Google paid $1 billion for a five percent stake in AOL, valuing the Time Warner unit at $20 billion. Last month, Google wrote down the value of that investment by $726 million, which assumes AOL's new valuation at $5.5 billion.

Google said that it wants what's left of its money back.

During a conference call with investors, Time Warner executives said that Google notified the company last week that it planned to exercise its "demand registration rights", which would essentially force Time Warner to buy back Google's stake in AOL or spin off AOL and take it public.

John Martin, Time Warner's chief financial officer, said that the company was evaluating its options.

In a statement, Google acknowledged the request, "AOL remains an extremely valued partner, and we'll continue to work closely together to provide their users with the best search experience possible. After careful consideration, we made the decision that we needed to exercise our rights now so we could be in a position to sell our interest when the timing made sense for us."

Meanwhile, AOL's ad revenues have dropped by 18 per cent in the fourth quarter of 2008, and six percent for the full year compared to 2007.

The Time Warner-owned firm was hit hard by the ad spending slowdown in 2008, said Jeff Bewkes, chairman and CEO of Time Warner. "The economy clearly affected our business, particularly in advertising at AOL and publishing," he said during the company's earnings call with investors this morning. "We're prepared for 2009 to be challenging too, in particular."

In the fourth quarter, display advertising on the AOL network fell 25 percent compared to the fourth quarter in 2007. Several advertiser verticals lowered ad spending, including personal finance, technology, telecom, autos, and retail. AOL also experienced a reduction in yield and inventory monetisation due to lower ad prices.