In December 2005, Google invested $1 Billion for 5% of AOL as part of a search and advertising partnership. The terms also gave Google the right to force Time Warner, parent of AOL, to conduct an AOL IPO or buy AOL’s stake back at “fair market value” as of July 1, 2008.

Beginning on July 1, 2008, we will have certain rights to require HoldCo to register the HoldCo interests held by us for sale in a public offering. If we exercise this right, Time Warner will have the right to purchase our interests for cash or shares of Time Warner stock based on an appraised fair market value of our equity interest in HoldCo in lieu of conducting an initial public offering.

At the time of the investment, AOL was valued at $20 billion. Industry sources estimate AOL’s valuation to be approximately $10-$15 billion today (same as Facebook’s paper value). If that is correct, it represents a realized loss of $500 million for Google on its investment.

However, Google is probably in no hurry to dispose of the investment, especially when Google’s search deal with AOL is still generating revenue. I would assume by July 2008, sufficient cash would have flowed through to Google to make up for the paper loss. More importantly the deal has enabled Google to lock up valuable search and search ad market share on a huge property. What is that worth? We all know what Microsoft paid Facebook for a taste of that.

It also puts Google is a position of strength when it comes to renegotiating the deal if the current valuation holds. I would also assume that Time Warner would be happy to sell more of AOL to Google because it puts more money in their coffers.

An AOL break-up or IPO would be likely if Google wanted to sell its stake – which does not make sense because it puts a large chunk of search and search ads market share up for grabs. However, a senior officer of AOL told me that some layoffs are still pending and that many AOL employees are praying for an IPO so that they can start feeling Googley.