Google in an SEC filing on Thursday said that its $1 billion investment in AOL is "impaired." That's short hand for saying Google bought a lemon.
In 2005, Google bought a $1 billion stake in AOL, which was good for 5 percent of the company. Google invested in AOL to elbow Microsoft out of the running for a search deal. The problem: Google bid up the value of AOL and it's highly unlikely that Time Warner could fetch the $20 billion valuation for AOL in 2005 (Techmeme).
Back in 2005, Google said of its AOL investment:
Google will invest $1 billion for an effective 5% equity stake in America Online, Inc., allowing the company to participate in AOL's future success. Google will become the only shareholder in AOL other than Time Warner. Time Warner will retain management control and full strategic flexibility over AOL, while Google will have certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL.
AOL's future success didn't quite turn out as planned. Google in its quarterly SEC filing didn't outline what it thought AOL was worth, but the search giant did seem to hint at a future charge over its investment in the company. Here's the Google's statement on AOL:
We review our investment in AOL for impairment in accordance with FSP SFAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”). Based on our review, we believe our investment in AOL may be impaired. After consideration of the duration of the impairment, as well as the reasons for any decline in value and the potential recovery period, we do not believe that such impairment is “other-than-temporary” at June 30, 2008 as defined under FSP 115-1. As a result, our investment in this non-marketable equity security is carried at cost on our Consolidated Balance Sheets. We will continue to review this investment for impairment in the future. There can be no assurance that impairment charges will not be required in the future, and any such amounts may be material to our Consolidated Statements of Income.
Cutting through the accounting jargon, Google is saying that AOL's value has declined permanently and won't recover. Can't argue with that assessment. Judging from Time Warner's most recent earnings report it would agree with Google.