published Mar 8th 2017, 6:03 pm, by Jef Feeley

(Bloomberg) —
AOL Inc. sought to cut a deal with online rivals Google Inc. and Facebook Inc. before agreeing to a $4.4 billion buyout by Verizon Communications Inc., the company’s top executive told a Delaware judge.

The New York-based company was plagued by operational problems and losing market share in 2015 when Verizon offered $50 per share to get access to its ad technology, Tim Armstrong, told a Delaware Chancery Court judge on Wednesday. Armstrong testified in a lawsuit filed by investors who claimed they were shortchanged in the deal.

“Our bucket was leaking every year to the tune of $10 million in losses and some years $100 million,’’ Armstrong said. “The Verizon offer was a good deal for the company.’’

Investment funds holding more than 8 million AOL shares want Chancery Judge Sam Glasscock to find that the Verizon deal undervalued the former Internet portal by more than $1.5 billion. The funds’ shares are worth more than $400 million at the deal’s current valuation, according to court filings. Shareholders are seeking nearly $19 more per share in the appraisal case.

Verizon, the nation’s largest wireless provider, is looking to media investments as growth slows in the mobile-phone industry. It bought AOL for its online-advertising assets and it’s buying Yahoo! Inc.’s Internet business for $4.48 billion.

‘You’ve Got Mail’

Once called America Online, AOL was one of the main pathways through which people first accessed the Internet. Its famous “You’ve Got Mail’’ slogan heralded the rise of email as a popular form of communication. The company’s trajectory peaked with a now-infamous $124 billion combination with Time Warner Inc. in 2000, after which it began losing customers to faster services from telephone and cable-television carriers. After years of losses the merger was unwound with a spinoff in late 2009.

AOL transformed itself into an Internet-advertising force, focusing on online video and programmatic advertising, which uses computer algorithms rather than salespeople to buy and sell ad space on websites. That system helps companies gather data and more efficiently target ads to specific consumers.

Still, the company struggled to meet its strategic goals, Armstrong said in court. The company hired investment bankers in 2014 to seek out offers from online giants such as Google, Facebook and Microsoft Corp., Armstrong said. They weren’t interested, he added.

Yahoo Combination

AOL also considered joining forces with Yahoo, another struggling Internet company, at the behest of some of its shareholders, Armstrong said. The CEO noted in an October 2014 email that “everybody knows there are synergies’’ in terms of costs and revenue from such a deal. Yahoo officials ultimately backed away from a combination, he added.

AOL directors agreed to the Verizon buyout in May 2015 after it added $3 per share to its original $47 bid, Armstrong said. “It was a very strong match,” he added.

During cross-examination, lawyers for shareholders said Armstrong failed to mention the buyout talks with Google, Microsoft and Facebook in securities filings and painted a rosier picture of the company’s prospects on 2014 and 2015 investor earnings calls than he did in court.

“From your testimony, AOL sounded like a company in trouble,’’ Mary Thomas, one of the investors’ lawyers, said. “But you told investors in a 2015 call that you’d had some success with your strategy’’ of transforming the company into an online advertising power.

“Isn’t that a different picture than the one you painted here today?’’ Thomas asked Armstrong.

“Same picture,’’ Armstrong replied, noting that he’d laid out the company’s difficulties in claiming market share and operational miscues as part of his testimony before Glasscock.

The case is IN RE Appraisal of AOL Inc., CA 11204, Delaware Chancery Court (Wilmington).

Updates with CEO’s cross-examination in 11th paragraph.
–With assistance from Lucas Shaw and Scott Moritz.To contact the reporter on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net Sophia Pearson, Joe Schneider
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