Internet Industry – 4 May 1999
2
n Further Thoughts
An AT&T/MediaOne merger would likely facilitate the
merger of @Home and RoadRunner. Through its TCI
ownership, AT&T is @Home's single largest shareholder.
The other major cable Internet access provider,
RoadRunner, is jointly owned by TimeWarner and
MediaOne. A merger of AT&T and MediaOne, therefore,
might make it more likely that a merger could be struck
between @Home and RoadRunner—a move that would
consolidate the cable Internet service provider market into
what would amount to an 80% market-share monopoly.
This would be good for @Home. We believe that an
@Home-RoadRunner merger would be good for @Home
for two reasons: 1) with RoadRunner's additional
footprint, the company would have a better chance to build
a nationwide content/access brand competitive with AOL's
(the more households that can sign up for the service, the
more mindshare and marketshare the service can generate),
and 2) the increased economies of scale would allow
@Home to both run more profitably and offer better terms
to its cable partners.
It might also be viewed as a negative for AOL—but
might actually turn out to be a positive. We believe that
an AT&T/MediaOne merger would also hasten the
division of the Internet access business into two camps:
AT&T, TimeWarner, and cable vs. the RBOCs. AOL
currently has partnerships with the RBOCs but, in our
opinion, is not so fully aligned with them that it shouldn't
be viewed as a potential partner (merger or otherwise) to
either side. The obvious is that if AT&T controls the cable
systems, it might shut AOL out with the aim of keeping
most of the resulting broadband access bounty for itself. If
Michael Armstrong at AT&T remains as visionary and
aggressive as he has been thus far, however, our guess is
that he would view a close partnership or merger with
AOL as a potential death-blow to the RBOC competition
(local phone service will soon be delivered over cable
lines). In our view, this makes AOL more valuable than it
would otherwise be: not only is it the dominant internet
access and content franchise in the U.S., it could
permanently tilt the balance of power in the local pipe
business. If Armstrong doesn't merge with AOL outright,
we still think it would be in his best interest to partner with
it on the access front—what better way to build dominant
share of broadband subscribers? Either way, in our
opinion, this would be good for AOL.
A MediaOne merger with a Comcast-led consortium could
probably be good for AOL and perceived as bad (or
neutral) for @Home. If the cable access world splits
semi-permanently in two (i.e., if ATHM and RoadRunner
continue to co-exist), we believe it will be much more
difficult for the cable companies to form a compelling
national access/content brand (if the high-speed service
is only available in some areas, it is hard to tout this in
national, AOL-style advertising campaigns). If AOL
were to help Comcast up its bid for MediaOne, we believe
it would do so only under the condition that Comcast use
its influence to try to ensure AOL acccess to either the
RoadRunner systems, which Comcast would quickly own
a sizable stake in, or in ATHM, which Comcast already
owns a piece of. Access to even one of the two
companies' cable partners, in our opinion, would vastly
increase AOL's negotiating leverage at the cable-access
bargaining table. If AOL doesn't participate in the new
offer, but MCI Worldcom does, we believe this might still
be good for AOL because MCI Worldcom has
demonstrated no interest in building a blended
content/access solution (as opposed to the cable
companies, which have).
Merrill Lynch is currently acting as a financial advisor and has rendered a
fairness opinion to At Home Corp., in connection with its acquisition of
Excite Inc., which was announced on January 19, 1999.
At Home Corp. has agreed to pay a fee to Merrill Lynch for its financial
advisory services, a portion of which is contingent upon the
consummation of the proposed acquisition.
The proposed acquisition is subject to approval by shareholders of both
At Home Corp. and Excite Inc.
This research report is not intended to (1) provide voting advice, (2) serve
as an endorsement of the proposed acquisition, or (3) result in the
procurement, withholding or revocation of a proxy.
Merrill Lynch is a financial advisor to AT&T
Corporation in connection with its proposed offer
to purchase MediaOne Group Inc. announced on
April 23, 1999. Merrill Lynch will receive a fee for
its financial advisory services.
[ATHM] MLPF&S or one of its affiliates was a manager of the most recent offering of securities of this company within the last three years.
[AOL] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
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Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
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