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Investor Carl Icahn Takes Steps to Block New AOL Google Deal

Investor Carl Icahn piped up earlier this week and issued a verbal warning to the Time Warner board of directors claiming that selling a piece of AOL to Google would be another "disastrous decision" for Time Waner.

The Time Warner board is on track to approve selling 5% of AOL to Google for $1 Billion in cash.

Icahn an outspkoen Time Warner shareholder wrote an open letter to the Time Warner board and also held a press conference claiming that selling 5% of AOL to Google is a mistake that limits AOL search and puts Google in the lucrative search marketing drivers seat at AOL for the next 5 years.

Icahn strongly labeled the deal as a "blatant breach of fiduciary duty" and to "enter into a 5 year keyword search results agreement with Google could prevent Time Warner from selling AOL outright to another party".

Icahn went onto to add "another transaction would be more beneficial for Time Warner shareholders".

The overly verbose Icahn, who only holds 3% of Time Warner stock claims he will attempt to start a proxy fight at the Time Warner shareholders meeting next year.

Time Warner's board yawned at Icahn's latest rant.

Icahn claiming to suddenly fully understand online marketing issues, including search marketing the internet's hottest industry of which Icahn has no experience to date, claims that fraud-laden eBay or old TV network pal Barry Diller's InterActive Corp. are better long-term matches for AOL than Google.

Wall street views Google's deal to purchase 5% of AOL from Time Warner as a very positive step for Time Warner and Google. The new Google deal could help AOL gain web traffic and search ad revenues, while also possibly preventing Microsoft's MSN from picking up AOL searchers.

Not one wall street analyst has acknowledged or even tried to comprehend Google's hidden motivation to purchase 5% of AOL and more importantly lock themselves in as the exclusive controller of AOL keyword search results. Google motivation is not entirely fueled by gaining search marketing share. Google's motivations also include two other important factors:

1) protect 100% of their search technology (code) from getting into Microsoft's hands.

2) Establish a 5% ownership in AOL, which puts Google in first position to purchase AOL outright for a song when all of AOL's current lawsuits are resolved. Google knows it could take AOL up to three years to escape all of their legal troubles.

Here's more on Google's 5% purchase of AOL from a search perspective:

Google is buying a 5 percent stake in Dulles, Va. based America Online for $1 billion as part of a far-reaching business and search advertising partnership that will link the two companies in many ways and will greatly enhance AOL's financial prospects, according to people familiar with the agreement.

The deal between Google and AOL is a setback for Microsoft Corp., which had sought to replace Google as the search engine on the AOL service and had been in talks with AOL's parent, Time Warner Corp, since January. Google is the leader in search, followed by Yahoo Inc. and Microsoft's MSN Search, which is a distant third.

Under the agreement, Google will remain the search engine on the AOL service with a revenue sharing from text-based ads provided by Google of about 80 percent to AOL and 20 percent to Google. In addition, AOL will get the exclusive right to sell other types of advertising, including banner ads, for the Google network. AOL will keep 20 percent of the proceeds from those ad sales; Google will get about 80 percent.

AOL is already the largest single source of ad revenue for Google, generating about 10 percent of Google's ad dollars, according to public filings. AOL's business strategy under its chief executive, Jonathan Miller, is to garner more of its revenue in the future from the rapidly-growing online keyword search advertising medium.

As part of the new agreement, AOL gains the right to sell Google-generated, text-based ads that appear on the AOL service. This change will enable AOL to sell all forms of online advertising itself to any company.

In addition, AOL's video service will get special promotion as part of Google's video offering. And AOL will have graphic ads that attract attention and appear alongside the text-based ads Google traditionally has displayed to the right of its free search results.

AOL will also be given a substantial fixed-dollar budget from Google to purchase advertising to promote the Internet service. Google's organic search results, based on math equations (algorithms used by bots or spiders) that rank sites according to content relevancy, will not be changed as a result of the new partnership.

Google's $1 billion investment in AOL will give the AOL service, which has more than 20 million subscribers and a network of websites that includes AOL.com, Moviefone and Mapquest, an implied value of $20 billion. The five-year deal gives Time Warner the choice of maintaining its 95 percent ownership stake in AOL, or keeping majority ownership while spinning off a portion of AOL to shareholders as a way of boosting its stock price.

Time Warner has been under pressure from financier Carl Icahn to take steps to get the Time Warner stock price up. Icahn, who owns only 3% of Time Warner has been pushing TW management to do a large stock buyback, spin off the Time Warner cable division and increase cash flow and shareholder value.

The terms of Google's 5% purchase in AOL were reached last week in New York in the Time Warner office suites of CEO Richard Parsons, where he was joined by Google CEO Eric Schmidt and AOL's Jonathan Miller. The Time Warner board of directors will vote on the agreement next week. In the interim days, lawyers for both sides will hammer out the legal details. On Wall Street, as news began leaking of Google besting Microsoft on Friday, Google's stock price hit $429 a share. The company, the leader in Internet search and advertising will be able to protect their PPC revenues as anyone or any party who clicks Google sponsored links on AOL results in more PPC dollars for both AOL and Google.

Is the sponsored traffic and link activity generated on AOL audited?

Does a third party intervene to legitimize the click triaafic being produced on the AOL network of sites?

Publishers need to audit circulation via the Audit Bureau of Circulations and broadcasters also need to audit their audience counts with Nielsen TV and Arbitron radio ratings.

Is search engine PPC advertising activity audited by an established third party?

And very rarely do any of the national search marketing industry stories ever mention ORGANIC SEARCH RESULTS.

Trade magazines and national press publications fail to make an important distinction in that the organic search results are what keyword searchers prefer and that organic search results are clicked 6 and 7 to 1 over paid listings on search results pages.

Much like TIVO, DVDR and other popular commercial cancelling media devices searchers are seeking information and relevant content not advertising. Google understands this trend and search behavior and needs advertising distribution partners such as AOL to help carry out their sponsored advertising messages onto portals outside of Google.com

Google understands REACH, always has, and that is why they are trading in the $450 dollar a share range.

In the end, a proposed joint advertising arrangement between AOL and Microsoft's MSN network proved complex and not as lucrative as the long-term potential of the partnership with Google.