"America Online and Google announced a $1 billion deal to expand their partnership, a move aimed as much at boosting their respective Internet advertising revenues as it is about thwarting the online ambitions of rival Microsoft.
The announcement late Tuesday confirmed a poorly kept secret. Word of the deal had leaked widely last week after AOL's parent company, Time Warner, ended weeks of negotiations by picking Google of Mountain View over Microsoft of Redmond, Wash.
While many details remained vague Tuesday, AOL and Google said the valley search giant will pay $1 billion for a 5 percent stake in AOL, valuing the company at $20 billion overall. AOL will be able to sell Google's search-related ads to appear on AOL properties.
The deal includes the prospect of adding more graphical ads throughout the Google network, though specifics remained vague. In addition, Google and AOL said they would enable users of their respective instant messaging services -- Google Talk and AIM -- to communicate with each other. AOL also will get an opportunity to have its content featured more prominently on Google.
While all these aspects should give a short-term boost to Google's and Time Warner's bottom line, one analyst said the deal's most important aspect was that it denied Microsoft a closer relationship with one of Google's biggest partners and customers.
``AOL was the last big Internet company that could have given Microsoft the scale it needed to compete with Google,'' said Jason Avilio, an Internet analyst at First Albany. Avilio owns no stock in any of the three companies and his company has no investment banking business with them.
The deal was approved by Time Warner's board Tuesday despite the last-minute opposition of Carl Icahn, the billionaire investor who has been leading a group of dissident shareholders who want Time Warner to radically restructure the company. In a letter to the board released Monday, Icahn said Google might not be the best partner for AOL and said the deal would be bad if it prevented AOL partnerships with other online companies, such as eBay.
The investment was announced after stock markets closed Tuesday. Time Warner fell 21 cents a share, or 1.2 percent, to $17.74. Google rose $5.14 a share, or 1.2 percent, to $429.74. Microsoft rose 3 cents to $26.86.
Time Warner officials declined to comment Tuesday. In a news release, Time Warner Chairman and Chief Executive Officer Dick Parsons said he expected the deal would benefit all of his company, not just AOL.
``As digital technologies continue to drive industries together, the great value and opportunity inherent in Time Warner's structure and array of premier businesses becomes increasingly clear,'' Parsons said in the release. ``A critical piece of this strategic alliance will be our content, which we will be making more accessible to Google users.''
Officials at Google did not return calls Tuesday. In the release, Google CEO Eric Schmidt said the move should help connect Google's users to more content.
``AOL is one of Google's longest-standing partners, and we are thrilled to strengthen and expand our relationship,'' Schmidt said in the release. ``This partnership is an important next step for our companies.'"
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