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August 8, 2008

Earlier this morning, Google said that it believes its $1 billion investment in advertising partner AOL dosen't look so good, and may very well represent a charge against its earnings. Google has a 5 percent minority stake in AOL.

Late yesterday, Google disclosed in a quarterly report filed with the Securities and Exchange Commission that its AOL stake it acquired three years ago "may be impaired." (Impairment is an accounting term used to describe an acquisition or investment that has lost significant value.)

The search giant acknowledged for the first time that it might have to recognize a loss on its investment, whose many problems have made it a financial nightmare for its owner, Time Warner.

Unless there is an about-face, the acquiring company eventually must absorb a charge on its books to account for the diminished value of its holdings, and must disclose it to its shareholders to whom Google is accountable to.

About its AOL investment, Google went on record by saying "there can be no assurance that impairment charges will not be required in the future, and any such amounts may be material."

Late yesterday, a Google spokesman declined further comment. As the Internet's most profitable company, Google could absorb a fairly large charge without too much pain. In the first half of 2008, Google earned $2.55 billion.

Some analysts have suggested AOL may be worth less than $10 billion today. And Google didn't estimate in its SEC filing what it believes its stake to be currently worth.

Getting ready for a potential sale, Time Warner is splitting up AOL's Internet access business from its online operations. EarthLink is seen as a leading candidate to buy AOL's dial-up access division while Microsoft and Yahoo could vie for online operations that include an array of advertising tools and services that still attract millions of Internet users.

Essentially, Google acquired its stake in AOL largely to prevent one of its largest advertising partners - AOL - from defecting to Microsoft three years ago. The bidding war helped drive up AOL's implied market value to a little over $20 billion, based on Google's investment.

At that time, Microsoft wanted to acquire Yahoo, but when the two sides couldn't agree on a price they separately began exploring a possible combination with AOL.

As part of its minority stake in AOL, Google has the right to demand that Time Warner spin off AOL in an IPO or simply buy back its holdings. However, and as of today, Google still hasn't indicated any interest in doing that.

It will be interesting to see how all of this unfolds in the next few weeks.

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Source: Google.