: BUY, BUY, BUY! Kevin Prigel
America Online NYSE:AOL
Internet | Technology
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Time Warner NYSE:TWX
Consumer Stocks
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Jan 11 2000
Over the past 24 hours the arb spread (the difference between what TWX and AOL shares are worth as a combined company, and what they're worth in the market) has narrowed immensely. As you can see in the chart below, Time Warner's shares are only "undervalued" by about 5%, while America Online shares are "overvalued" by about 5%. These spreads are completely normal, and represent the belief by the market that the merger falling apart is very unlikely.
I continue to believe that AOL Time Warner, as a combined company, and America Online, as an independent company represent compelling investment opportunities. However, unlike yesterday (when the advantages of buying TWX far below its merged value far outweighed risks), I believe that the way to buy the merged company now is with shares of America Online. The key points to this strategy include:
In the event of a failure of the merger, Time Warner shares will fall dramatically. I do not believe that America Online would suffer the same fate.
A 5% spread is not worth the aforementioned risk.
I believe that the possibility of a hostile bidder entering the picture is slim to none. Who else can pay over $170 billion for TWX? There are only 8 companies with market capitalizations above $180 billion. One is an oil company (ExxonMobil), one is a money center bank (Citigroup), one is a retailer (Wal-Mart), two are technology companies with no need for content (Intel and Cisco), one would have a minor interest (IBM), and two are serious contendors (Microsoft and General Electric) who would both be scrutinized by the government.
Current Market Capitalization
AOL 149
TWX 111
Combined Market Cap 260
Share of Combined Company
AOL 143
TWX 117
Market Value To Merged Value Difference
AOL -4.0%
TWX 5.4% |
