Will AOL emerge as takeover bait?
Commentary: Stock fall may spark: `You've got suitors!'
By Jon Friedman, CBS.MarketWatch.com
Last Update: 12:10 AM ET July 26, 2002
NEW YORK (CBS.MW) - Will AOL Time Warner, whose long-sliding stock crashed through the $9 threshold during trading on Thursday, soon emerge as a takeover target?
AOL subsequently rose from the canvas to narrow its loss and close down $1.76, or 15.4 percent, to $9.64. Even with the stock's late-afternoon comeback, of sorts, its price remains very cheap.
AOL is now so cheap that, in New York, for instance, it costs less money to buy a share of AOL Time Warner's stock than it does to purchase a ticket to AOL's big summer movie, the third "Austin Powers" installment.
AOL's stock has tumbled 74 percent in the past year. If it continues to plunge, it's possible that a shark could begin to circle the world's biggest media company. An acquisition of AOL would be an ignominious conclusion for the ballyhooed America Online-Time Warner combination.
When America Online announced in January 2000 that it would be acquiring Time Warner for an estimated $124 billion, the thought of a takeover of the combined entity someday seemed unfathomable.
And remember, today, AOL Time Warner has been in existence for only 18 months. It reported the biggest loss ever in the first quarter. In the past two months, its chief executive officer, Gerald Levin, and its chief operating officer, Robert Pittman, have resigned under pressure. The company's America Online flagship division continues to look like a sinkhole, and the parent conceded Wednesday that the Securities and Exchange Commission was investigating the unit's accounting practices.
The idea of a takeover may not be so far-fetched, after all.
"Is it possible? Sure," said Todd Salamone, the research director of Schaeffer's Investment Research, in Cincinnati. "But you have to ask who would be willing to take on these problems."
"Everything is for sale for a price," said Mort Pierce, chairman of the Mergers and Acquisitions Group at Dewey Ballantine, a law firm, in New York.
James McGlynn, a fund manager with the Summit investment operation, said, "If they gussied up parts of it for a sale, sure, someone would look at the company."
During trading on Thursday, AOL's stock plunged as low as $8.70, reflecting a more than 23 percent tumble at that point. The catalyst was the company's admission the day before that the SEC is investigating America Online.
Screaming
On the basis of its low stock price alone, AOL would appear to be what Wall Streeters lovingly call a "screaming buy."
And don't forget that plenty of Wall Street's best and brightest have liked AOL for a long time. "Right now, 25 of 34 AOL analysts recommend it as a buy," Salamone of Schaeffer's Investment Research, said.
"It's surprising how people can stay this optimistic and not learn lesson," said Schaeffer's Salamone. "People couldn't believe Sun (Microsystems) could go below $15 and now it's trading below $4 (SUNW: news, chart, profile). The sentiment on AOL is very optimistic and this has been prevalent throughout the decline."
But then...AOL has an array of impressive assets, particularly its cable systems and Home Box Office, whose show "Six Feet Under" recently garnered more Emmy nominations (23) than any other program. Last December, AOL's movie division boasted such mega-hits as "Harry Potter" and "Lord of the Rings," both of which promise to be blockbusters for many years to come as sequels.
On Wednesday, AOL (AOL: news, chart, profile) Chief Executive Richard Parsons crowed to investors after the world's largest media company released better-than-usual financial results.
Is AOL's stock a screaming buy, or is it simply worth screaming about? Maybe it's a mixture of both.
CNNmoney, a division of AOL, no less, bringing together two of its most popular brands, asked the public to give an opinion on a question. "At $10 a share, is AOL Time Warner stock a) a bargain? B) overpriced? C) priced at what it's worth?
The question drew 9,062 responses and they went like this: a) 43 percent b) 34 percent c) 23 percent.
As pundits try to guess the direction of the AOL stock, the SEC investigation is the wild card. In this scary environment of post-Enron/Tyco/Adelphia/WorldCom scandals, everyone is edgy. Some stock market followers believe the government is going overboard. In fact, some investors even regard the government's purge to be a "witch-hunt."
In its probe of America Online, it's unclear what the government will find. AOL CEO Parsons said Wednesday during a conference call with investors that AOL's auditor, Ernst Young, had checked and re-checked AOL's accounting procedures. Parsons said he was confident everything was in order.
"Assuming the SEC investigation comes up with nothing, there is no reason why the company can't go out and compete," said Pierce of Dewey Ballantine.
A clean bill of health from the government won't be enough to change investors' opinions about AOL, however. Fund managers say AOL has to do more to attract customers.
"I think the company has to become more pro-active and bundle their assets," said James Thorne, a vice president of M&T Capital Advisors Group in Buffalo. "AOL has been lethargic in embracing broadband strategy. They should do something to make people want to own the services. They have to start providing value for money."
What a difference 28 months (not to mention, a dizzying, endless pace of controversies and outrages) make for a company's image.
"At the top of the market," investment manager McGlynn mused, "people talked seriously about how AOL Time Warner was going to overtake Microsoft (MSFT: news, chart, profile). Now, at the bottom of the market, the same people are taking it out behind the barn and shooting it. It's surreal."
Jon Friedman is media editor for CBS.MarketWatch.com in New York. |
