Verizon Communications Inc said it would buy AOL Inc in a $4.4 billion deal that gives the biggest U.S. wireless carrier access to AOL's mobile video platform and content including the Huffington Post news website.
The offer of $50 per share represents a premium of 17.4 percent to AOL's Monday close of $42.59.
AOL shares traded as high as $50.70 before the opening bell on Tuesday. Verizon shares were down about 1 percent at $49.32.
The offer highlights the need of telecom companies to diversify as their wireless businesses mature and more consumers watch videos and access other content on cellphones.
AOL Chief Executive Tim Armstrong, who will continue to lead the company after the sale, said mobile will represent 80 percent of media consumption in the coming years.
"...If we are going to lead, we need to lead in mobile," he said in a memo to AOL employees.
Verizon brings with it over 100 million mobile consumers, content deals with the likes of the NFL and "a meaningful strategy" in mobile video, Armstrong said in the memo.
AOL bought Time Warner for more than $160 billion in 2000 in what turned out to be one of the most disastrous corporate mergers in history.
AOL was spun off from Time Warner in 2009 at a value of about $3.4 billion.
Armstrong has since spearheaded AOL's transformation into one of the most successful advertising technology companies.
Activist-investor Starboard Value LP had urged Yahoo Inc to consider a merger with AOL, whose businesses include the TechCrunch blog.
Starboard could not immediately be reached for comment.
"The primary attraction of AOL was the technology it has developed for selling ads and delivering online and mobile video," Wells Fargo Securities analyst Jennifer Fritzsche wrote in a note.
Verizon has been investing in emerging technology to tap into the market shift to digital content and advertising.
AT&T Inc, the second biggest U.S. telecom company, is diversifying by buying the No.1 U.S. satellite TV provider, DirecTV, for $48.5 billion.
AOL reported a 7.2 percent rise in first-quarter revenue to $625 million, boosted by demand for its real-time bidding platform that helps advertisers place video and display ads on other digital properties.
The deal, which includes about $300 million of AOL debt, will take the form of a tender offer followed by a merger, with AOL becoming a subsidiary.
Verizon said it expects to fund the transaction from cash on hand and debt.
LionTree Advisors, Weil Gotshal & Manges and Guggenheim Partners advised Verizon. AOL's advisers were Allen & Co LLC and Wachtell Lipton Rosen & Katz.
Up to Monday's close, AOL's shares had gained 12 percent and Verizon's 3.4 percent in the past 12 months.
(Reporting by Devika Krishna Kumar and Abhirup Roy in Bengaluru; Editing by Savio D'Souza, Saumyadeb Chakrabarty and Don Sebastian)