02.06.11

AOL Buys Huffington Post: Arianna Cashes Out

The Internet company is paying $315 million for The Huffington Post, $300 million of it in cash, and Arianna Huffington will become editor in chief of all of AOL's media properties Randall Lane on her vote of no-confidence.

The Internet company is paying $315 million for The Huffington Post, $300 million of it in cash, and Arianna Huffington will become editor in chief of all of AOL's media properties. Randall Lane on the most unusual part of the deal. Plus, Howard Kurtz on the company’s gutsy move, Dan Lyons on why it'll be a disaster, and more details on the sale.

The overnight media news blockbuster— AOL buying The Huffington Post for $315 million—makes a statement on several levels. It's a statement from AOL that its future lies in creating media and selling advertising against it—this deal removes any confusion about that. It's a statement from The Huffington Post that being a standalone media product, no matter how mighty, can be a lonely place. But to me, the most emphatic message was delivered by the currency involved in the transaction: cold, hard cash.

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The primary reason for a company to be publicly traded—in the age of Sarbanes-Oxley, there are dozens of reasons against—is the currency it provides to go do grand things. In terms of corporate culture, AOL understands this concept better than any company in the world: in 2000, AOL used its inflated stock to swallow blue-chip Time Warner. For Time Warner it was perhaps the worst media deal in history; for Steve Case and his partners, whose core business, fee-based Internet access, would quickly die, it was a godsend and likely the reason AOL still exists today.

AOL, even after its spinoff from Time Warner in 2009, remains a public company. So why did it pay almost completely in cash? (Just $15 million of the transaction is in stock.) Because while AOL clearly believes fully in The Huffington Post, Arianna and her squad just as clearly don't believe fully in AOL.

AOL CEO Tim Armstrong is a sharp guy. There is no way AOL wouldn't have preferred to do this as a stock deal. That would have allowed the company to hoard its cash—key, given AOL's bumpy performance and untested prospects—and lashed its new acquisition to the fate of the whole. The push for a cash buyout had to have come from The Huffington Post team.

Which is all well and good if this was the kind of deal where the old management delivers the company, cashes its checks, and then occasionally sends postcards in from semi-retirement to ask how it's going, as HuffPo's savvy CEO Eric Hippeau will reportedly do. But that's far from the case here. As part of the deal, Huffington has been named editor in chief of all of AOL's media properties, which besides HuffPo include TechCrunch, Engadget, and the local-oriented Patch network. Aside from Armstrong, she's easily the most important person dictating AOL's future.

AOL's future is largely in the hands of someone who, while immensely talented, has also expressed reservations—with her pocketbook.

Which again makes the cash transaction so curious. Besides deal currency, stock is best used as incentive to lure top talent, or get them stick around. Already quite well off before HuffPo, let's say, for argument's sake, that Huffington owned a third of the company she just sold. That would mean she just pocketed another $100 million, cash. (She'll pay capital gains tax on that, which is another strong indication she's not bullish on AOL. If she'd taken stock, there would have been no taxes on this deal. It would have been a simple stock swap, with that IRS day of reckoning pushed down the road.)

So what kind of incentive can Armstrong possibly give Huffington? The lion's share of that $15 million in stock included in the deal? A new package loaded with scads of stock options? I'm sure those are both on the table, but when someone is sitting on nine digits, that kind of package isn't a motivator.

Having met Huffington several times, I can attest to what those who know her better insist on: She's smart, curious, and dedicated. I never figured that money drove her and have no doubt that she's excited about her new gig.

But The Huffington Post was hers, from the name up. She conceived it, nurtured it, lived with it. Now, while her name will remain atop the division she heads, AOL's "Huffington Post Media Group," she's just an employee. It's the difference between a mother and a babysitter. They both love their kid, but only one will race into a burning building to save it. Especially with a swollen bank account back home.

This isn't to say that it's not a smart deal for AOL. The company needed something like this, desperately. It's just that its future is largely in the hands of someone who, while immensely talented, has also expressed reservations—with her pocketbook.

Randall Lane is editor at large at The Daily Beast. The former editor in chief of Trader Monthly, Dealmaker and P.O.V. magazines, and the former Washington bureau chief of Forbes, he is the author of The Zeroes: My Misadventures in the Decade Wall Street Went Insane.