Summary

  • AOL paid $859.8 million net of acquired cash for Bebo in May 2008. On 16 June 2010, it sold substantially all Bebo assets; its final annual filing recorded a roughly $1.8 million pretax loss on that asset sale.
  • AOL expected to earn advertising revenue on its own properties from customers who had bought ads on Bebo. It therefore did not present Bebo as discontinued operations. Separately, it recorded a $300.0 million deferred tax asset from an expected worthless-stock deduction and used $141.6 million of it against 2010 tax obligations.

A sale with an unusually long tail

The curious sentence in AOL's 2010 annual filing comes after the sale. AOL had disposed of substantially all Bebo assets. It still expected advertisers who had bought space on Bebo to buy advertising on AOL Properties. That expectation determined how the company showed the business in its financial statements: Bebo's financial condition, results and cash flows were not presented as discontinued operations. The social site could go; the sales relationship was still part of AOL's continuing business story.

The acquisition had been sold internally on precisely that kind of logic. AOL's 2009 Form 10-K records the 14 May 2008 purchase at $859.8 million net of cash acquired. It assigned $765.8 million to goodwill and $86.5 million to intangible assets, including technology, customer relationships and trade names in its acquisition discussion. AOL said the acquired businesses were meant to attract and engage users and provide advertising services. Bebo was a social network, but the buyer's ledger valued a route to audiences and customers as well as software.

By April 2010, AOL's own results announcement listed sale or shutdown among the alternatives for Bebo. Shutdown was an option, not the outcome. On 16 June, the company sold substantially all its assets. The quarterly filing made just after the transaction put the pretax loss on the sale at $2.2 million. The final 2010 annual filing revised that figure to approximately $1.8 million. Neither figure states the sale price, and neither measures the loss between the 2008 acquisition and 2010 exit. They are accounting results for the asset disposal.

The tax entry was larger than the sale loss

The annual accounts placed another number beside the exit: $300.0 million. AOL expected to treat its Bebo common stock as worthless for US tax purposes and recorded a deferred tax asset and matching income-tax benefit on that basis. It said $141.6 million of the asset was used to offset federal and state tax obligations during 2010. The $300.0 million was an accounting asset tied to a tax deduction, not a cheque from Bebo's buyer. The roughly $1.8 million was a pretax loss on the assets sold, not the original acquisition's price tag reversed.

Putting either number in a headline as the resale price would manufacture a transaction AOL's cited accounts do not report.

The filing's treatment of the advertising customers is the more revealing line. A sold website and its former advertisers did not have to occupy the same account. AOL expected to place ads for those customers on the properties it still ran. That was an expectation, not a published list of subsequent orders. Its annual report does not identify which customers returned or what they spent after the sale. The statement is strong enough to explain the continuing-operations presentation, and no stronger.

For comparison within the same filing, AOL did classify the sold buy.at and ICQ businesses as discontinued operations. Bebo's different treatment was tied to the anticipated advertising revenue. The distinction gives the exit its shape: a product can leave the portfolio while the seller keeps trying to sell to the people who once paid for attention inside it. The 2008 wager had put a large price on Bebo's audience and advertising potential. The 2010 record shows the site assets gone, the stock written toward a tax deduction, and a client route still drawn on AOL's map.

Original records