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Google Assured Liquid Shot at AOL

On December 20, AOL announced that Google would take a tiny stake for big bucks. Securities and Exchange Commission (SEC) documents filed on Friday show the search goliath's exit strategy.

According to the report filed by Google, beginning on July 1, 2008, it can begin to seek payback for the $1 billion it spent for a 5 percent stake in AOL, which is owned and operated by Time Warner .

On that date, the sultan of search can register its interest in the company for sale in a public offering. If Time Warner doesn't want to spin off AOL and take it public, it can buy out Google for cash or shares of Time Warner stock.

"They want to give themselves as many options as possible for liquidity," said Tom Taulli, author of Investing in IPOs. He said this was a common requirement for major investments.

Taulli explained that Google has a "put option. They can put the shares back to Time Warner, get the shares registered or get cash for the shares." While some such agreements include a "floor" for the share price, this agreement doesn't define a minimum return on Google's investment.

The SEC filing also detailed the partnership agreement. Google and AOL extended the term of their current multi-country agreement on Web search and pay-per-click advertising for another five years. Google will be AOL's exclusive provider of search and search advertising, with Google continuing to guarantee AOL a minimum amount of ad revenue.

That ad revenue guarantee, initiated at the beginning of the companies' partnership, was a bet-the-farm ploy for Google at the time, Taulli said.

"If it did not pan out, Google would have gone bankrupt," he said. But Google's bet paid off: Search advertising became huge, and Google made a lot of money off ads on AOL.

Google will provide its search advertising technology for use by AOL, so it can sell its own pay-per-click advertising on AOL sites, while AOL can sell display advertising into Google's network.

Google will give AOL advertising credits pegged by news organizations at $300,000 and also pay to sponsor AOL properties, events or other initiatives.

The two companies agreed to work to make AOL Instant Messenger and Google Talk interoperable.

"AOL is critical to success for Google," Taulli said. "Google needed eyeballs and critical mass for AdWords. AOL needed a business; their business has been faltering for a long time. It was a classic win/win strategic alliance that helped both parties."



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