Morning cb,
an interesting read on AOL/TWX from Steve Harmon:
NetStock! By Steve Harmon
chairman & CEO
e-harmon.com, Inc.
Internet Investment Provider
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2000.01.12:
Will AOL Get Real?
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The haircut AOL has taken in its stock reflects the proposed percentage
ownership of the combined company. But don't let haircuts fool, a hippie of
a media, commerce and communications giant is there amid that buzz.
As we said in our report Monday morning, before the merger AOL traded at
double Time Warner. The deal calls for just about a even split. Result: Time
Warner shares (TWX) are up dramatically while AOL (AOL) down slightly.
The question centers on "fair" valuation for both companies. And different
valuation models.
History: media companies traditionally trade at a discount to their "private
market value" (PMV). Time Warner, Disney (DIS), News Corp (NWS), CBS (CBS),
and many more typically trade at 60% to 75% of the PMV of the assets. It
always takes a 'catalyst' such as a merger or acquisition to draw out mature
media value.
It's no accident that TWX closed the gap between trading value and PMV once
AOL modemed the deal over.
Mature media trades at a multiple of cash flow (EBITDA). Time Warner, for
example, traded at 11x cash flow before the merger was announced. January 11
TWX traded at 14x cash flow.
Internet companies, meanwhile, are valued on revenue multiples and value per
user due to their explosive growth. AOL's latest results showed revenue
growth of 47% for its latest quarter.
Time Warner would be extremely lucky to ever see that kind of growth, on its
own.
The key now is will the combined AOL-Time Warner maintain an Internet-growth
curve and not be dragged down by the slower growing print and broadcast
assets.
If you consider the emerging broadband world then AOL-Time Warner may
experience a rapid ramp in broadband Internet via cable (which TWX owns), vi
satellite (which TWX owns), with print and broadcast assets (which TWX owns)
pointing to AOL.
Ironically if you look at the balance sheet of consumer-centric Internet
startups and all Internet media companies then you'll see that a large piece
of their budget annually goes for sales and marketing. Branding basically.
Internet firms are spending heavily for offline media exposure on TV, cable,
broadcast, print.
Beneficiaries of this trend at least short term are the old-line media
companies of which Time Warner is the largest media company on the planet.
So an immediate plus of the merger is the instant marketing built into the
deal. It's probably worth $30 billion in hard dollars over 10 years to AOL
to be integrated into Time Warner's marketing machine and media venues. If
not more.
The new combinations of content, commerce, communications that a hybrid
media company can do I believe are more than accretive. Sort of like when
you combine chocolate and peanut butter you have a much better snack than
either alone.
So despite AOL's stock softening I think a combined company operates under
the math, 1 + 1 = 3. That means AOL-Time Warner together I see as much more
valuable than apart. In fact, AOL-TWX ought to command a valuation in line
with GE or Microsoft.
The future of commerce is at stake. Service-based platforms -- of which
media/communications are primo -- scale well. Even though they are
software-based they are not software apparent. Truly great commerce happens
as a result of invisible market mechanisms (Adam Smith reduced).
When radio required crystal sets few people tuned in and fewer produced
content or commerce for the platform. Printing presses made newspapers
affordable and global. Scribes did not.
While Microsoft especially owns the software platforms (or many of them), an
AOL-TWX owns the service platform. Some 50 years after CBS began TV
broadcasts it still broadcasts. Most technology companies suffer a shorter
life cycle. The companies making TV tubes for the old TV sets (circa
1960-1970s) are long gone. NBC, ABC and CBS still have 99% of all TV
households covered daily. Service has a shelf life that technology does not.
Similarly, Yahoo's valuation relies in this premise. It bolts on technology
to enable the service. Outsource or acquisition. While a large double-digit
percentage of Yahoo's employees are software programmers it's invisible.
Service matters. Software enables service only.
Getting back to AOL-TWX I put a "fair" value on the combined company at
north of $350 billion within 48 months as this notion of service scaling
becomes more apparent. AOL-TWX can do new commerce, new communication, new
community, new content across TV, Web, print, cable, telephony, data,
commerce.
AOL-TWX can rely on Microsoft for its software ad infinatum. They may. But
if Microsoft ever wants to own the consumer media space -- which it will
because I believe all commerce will swirl around this media base -- then
AOL-TWX could be in trouble relying on Microsoft solutions solely.
So what could AOL-TWX possible use? I think RealNetworks (RNWK) may be a
good fit. 50-million users of its RealPlayer and a network that ties in
nicely with AOL-TWX. AOL-TWX needs a multimedia portal/network and only
RealNetworks has this I believe. It's a counter to any future leverage
Microsoft may hold out over AOL-TWX.
At $9 billion market cap it also seems cheap compared to its potential
future value, basically a multimedia media network.
Time to look at the next move AOL should make.
You've Got Real? |
