Market Place: Happy Days After the
AOL-Time Warner Merger
By ALEX BERENSON
ACK in January, in the good old days
when Internet stocks were hot,
America Online agreed to buy Time
Warner with AOL stock. The deal, if
approved by regulators, would leave AOL
shareholders with 55 percent of the merged
company, even though Time Warner's revenue
and cash flow are far greater.
AOL stock has since fallen almost a third,
destroying most of the premium the company
had offered for control of Time Warner. So a
Time Warner shareholder might conclude that
America Online's chairman, Stephen M. Case,
had bamboozled his Time Warner
counterpart, Gerald R. Levin, into taking AOL
shares at the worst possible time.
"Short term, anyone objective would say
probably Steve got the better part of the deal,"
said Larry Haverty, a senior vice president at
State Street Research in Boston and a
longtime media investor.
But Mr. Haverty, like many other Time
Warner holders and industry analysts, hardly
cares. With the deal likely to be completed
this month, he predicts that the merged
company will grow quickly by combining
AOL's marketing skills and captive base of
online users with Time Warner's huge library
of films, magazines and the like and its
relationships with major advertisers.
"The deal strategically and financially makes all
the sense in the world," Mr. Haverty said.
"Five years out, if you're a shareholder in this
company, you're going to be a happy
camper."
That view is widely shared. "Strategically, it
makes a lot of sense," said Tom Wolzien of
Sanford C. Bernstein. "These companies fill
the holes of the other one. They're
subscription-advertising combo models. The reality is the pieces are very
compatible."
To be sure, the recent history of big media mergers is hardly comforting
for shareholders in either AOL or Time Warner. Disney stumbled badly
after it bought Capital Cities/ABC in 1996, and Time Warner stagnated
for five years after it was created in 1990 by the merger of Time and
Warner. "Huge deals are really hard to do and create a lot of
uncertainty," said Roger McNamee of Integral Capital, which sold its
404,000 AOL shares the day the merger was announced.
But if the merged company can overcome that hurdle, it will have big
advantages over Disney and other traditional media companies, which
are still struggling to figure out how they can profit from the Internet, said
Jessica Reif of Merrill Lynch.
"Given the multiple distribution platforms that they have, it's obviously a
very powerful consumer engine," she said. "There's a reason that you see
Disney and to a lesser extent NBC screaming in Washington" that they
are at a disadvantage in reaching AOL subscribers.
John Schreiber, an assistant portfolio manager at Janus Capital, the
mutual fund company that is Time Warner's largest shareholder, with
more than 120 million shares, said the companies had already begun to
demonstrate how they would work together. For example, AOL has
pitched Time Warner's magazines to its users, resulting in hundreds of
thousands of new subscriptions. And the companies are trying to sell big
advertisers on deals that will reach both America Online users and the
people who watch Time Warner cable channels and read its magazines,
Mr. Schreiber said.
"Once the merger closes, I think you'll see some very powerful cross-
promotional deals across all of Time Warner's advertisers," he said.
Mr. Schreiber also says the risk of cultural clashes between the
companies is limited, because the merger partners disclosed publicly
where top executives would stand in the combined company only a few
weeks after the deal was announced. So people who feel their
responsibilities have been diminished have had months to look for new
jobs, and some have already left, he said.
Given the strength he sees in the combined company, Mr. Schreiber said
the question of whether Mr. Levin could have negotiated a better deal
with America Online is moot. Shares in cable companies like Comcast
have fallen 15 percent or more this year, while big media companies have
been flat or up slightly. So "it's not as if Time Warner shareholders have
lost out on a great deal of upside," Mr. Schreiber said. |
