Chuzz
I just posted this on the AOL thread but it seems appropriate here, too, so I'll repeat it, though I doubt AOLers won't be happy with me for say it.
Until today, AOL was in two business, "connectivity" (ISP) and "community" (portal). The connectivity business is growing between 35-50% but is a low margin business. (The last time I figured it out, it cost AOL about $17.50 of the $21.95 it got from subscribers to provide Internet service for a month.) The "community" business is a high-margin advertising and e-commerce business but accounts for only about 23% of AOL's revenues, though the vast majority of AOL's earnings growth.
Now , AOL has gone into the content business, merging with Time Warner, a company with at 5-year sales growth rate (according to Yahoo) of 17.25% as compared to AOL's 110% five year growth rate. What this means, among other things, is that AOL's high growth rate advertising and e-commerce business will now have to tow two sluggish businesses (connectivity and content) not just one.
This attempt at vertical integration, IMO, has reduced the future growth potential of the combined companies and their combined valuation. In this case, longer term, the sum of the parts is probably worth less than the whole.
Best
--Steve
p.s. Short term, Wall Streeters are shorting AOL and buying TWX to arbitrage the valuation difference between the two issues. This will continue until the valuations relative to each other approximate the 1.5:1 merger. |
