The acquisition announced Monday is among the most aggressive strategic moves engineered by AOL CEO Tim Armstrong in an effort to reshape a fallen Internet icon.
Perhaps just as important as picking up a news site that ranks as one of the top 10 current events and global news sites, AOL will be adding Huffington Post co-founder and media star Arianna Huffington to its management team.
After the acquisition closes later this year, Huffington will run AOL's growing array of content, which includes popular technology sites Engadget and TechCrunch, local news sites Patch.com and online mapping service Mapquest.
The price that AOL is paying is "really just the hiring fee to get Arianna," said technology analyst Rob Enderle. "This is one of those out-of-left-field moves that actually makes a lot of sense. This could put AOL back on the map."
Putting Arianna Huffington into a position of power could also eventually threaten Armstrong's job security if AOL still struggles, Enderle said.
In a blog post about the deal, Arianna Huffington praised Armstrong's vision for AOL and said they were on the same page as they discussed their ambitions for online news. "We were practically finishing each other's sentences," Huffington wrote. She said the deal was signed at the Super Bowl in Dallas, which she and Armstrong attended.
The Huffington Post, which now draws 25 million monthly visitors, has built its popularity by bringing together news from a wide selection of other media outlets, linking to articles and video on everything from politics to style to food. It even has a new section on divorce.
It combines that type of aggregation with original work by its own small staff and blog posts from celebrity contributors who work for free in return for a platform to express their opinions. Robert Redford has written for the site, along with Bill Gates, Barack Obama and several university presidents.
Armstrong, a former Google Inc. executive, has been trying to turn AOL into a go-to place for a wide variety of news since he was hired to turn around the company in April 2009 while it was still a part of Time Warner Inc. The makeover is designed to give people a reason to visit AOL's websites more frequently to help boost ad sales.
At the same time, Armstrong has laid off hundreds of employees to try to boost AOL's financial performance and stock price. It has been a slog so far. AOL lost more than $780 million last year, largely because of accounting charges, and the company's stock is now worth slightly less than after it was spun off from Time Warner Inc. 14 months ago.
The deal "will create a next-generation American media company with global reach that combines content, community, and social experiences for consumers," Armstrong said in a statement announcing the deal.
Founded in 2005, Huffington Post is owned by Arianna Huffington, Kenneth Lerer and a group of other investors. They will get $300 million of the purchase price in cash.
Gartner analyst Andrew Frank called the deal "strategically sensible" for AOL. It's risky, he said, in the sense that media acquisitions are inherently risky these days.
"There is a lot of effort ahead for online media to recapture the glory days when media was booming business," he said. "Deals like this offer hope. On the other hand you can't really dismiss the somewhat uneven record AOL has had with acquisitions."
On a conference call with analysts, AOL Chief Financial Officer Arthur Minson said the company expects Huffington Post will generate $50 million in revenue this year, with a profit margin of 30 percent.
By comparison, AOL drew $2.42 billion in revenue last year. About 53 percent came from ads, and most of the rest from its dwindling base of dial-up Internet subscribers.
Minson said the deal will save AOL $20 million a year by allowing it to eliminate operations that overlap with Huffington Post.
If it wins regulatory approval as expected, the deal would likely close in late March or early April.
Armstrong has been an aggressive deal maker since his arrival, but this marks by far the biggest acquisition of his tenure. Various published reports quoting unidentified people have also said he has talked to private equity firms about the possibility of trying to buy Yahoo Inc., another struggling Internet pioneer that remains a household name. Yahoo CEO Carol Bartz, though, has shown little interest in working with AOL.
AOL had just a 5.3 percent share of the U.S. display advertising revenue in 2010, down from 6.8 percent in 2009, according to eMarketer. Facebook, meanwhile, accounted for 13.6 percent of display revenue last year, up from 7.3 percent in 2009.
Huffington Post grew quickly from startup to online colossus. Over time, it launched city-specific pages and developed a roster of sections such as food and books. The work of its 70-person paid staff is augmented by content from news outlets and 6,000 bloggers who write for free.
Shares of AOL, which is based in New York, fell 12 cents to $21.82 in midday trading Monday.
AP Business Writers Andrew Vanacore and Barbara Ortutay contributed to this report.