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Technology Stocks : America On-Line (AOL) -- Ignore unavailable to you. Want to Upgrade?

To: JayPC who wrote (37047)	1/11/2000 1:03:00 AM
From: brian z	Read Replies (1) \| Respond to of 41369

Stocks in Focus Jan 10 2000 5:00PM CST Archives... AOL-Time Warner Deal is Great for Time Warner, Not AOL by Chris Connor Today, America Online {AOL} and Time Warner {TWX} announced a mega-merger that would create a company worth around $350 billion. The deal is excellent for Time Warner because it gives their content a great chance to be a success on the Internet. On the other side, the reason why AOL bought Time Warner is equally apparent - broadband capabilities. However, AOL could be significantly sacrificing future growth, and its stock price, by making this deal. First, the deal melds an old school media company with an Internet powerhouse. In theory, it makes sense because two powerful media are converging, cable TV and the Internet. In addition, both are the leading brands in their respective mediums. However, AOL trades at a PE of over 200 because it is viewed as an Internet stock, not a media company. AOL will no longer be a pure Internet play like Yahoo {YHOO} as a result of this deal. Second, AOL will lose a significant portion of its agility because of Time Warner's immense size. The company will just be too big to grow rapidly. Any company can grow only so large before growth slows and eventually halts. One of the greatest companies in the world is facing that problem right now - Coca-Cola {KO}. Microsoft {MSFT} has shown signs of slowing down as well, though not to the extent of Coca-Cola. In addition, the combined AOL-Time Warner will have three men (Steve Case, Ted Turner, and Gerald Levine) at the top who are used to being the top banana, two of whom have had little success on the Internet with their world class brands (Levine and Turner). Third, there is the matter of Time Warner's debt and bottom line. Time Warner has a horrible debt-to-equity ratio of 2.03 while AOL has virtually no debt with a debt to equity ratio of only .09. Now, let's compare the two companies' bottom lines. AOL has an excellent bottom line with a net profit margin of about 16.6 percent and a return on equity of 35.36 percent. In contrast, Time Warner has a pitiful bottom line with a profit margin of 5.1 percent and a return on equity of 9.53 percent. Simply put, AOL brings in substantially more profits from its revenues and investments than Time Warner does. Fourth, Time Warner was one of the first media companies on the Internet and it failed to capitalize with its brands in this new media venue. AOL's content has been successful because AOL has made wise moves with major Internet content providers who drool over the level of exposure that AOL can provide. Besides, if AOL needs content it could buy much smaller content companies easily. Finally, there is the question about whether cable will be the broadband technology of choice over the long term. A recent cable modem deal with Cisco {CSCO} and Texas Instruments {TXN} significantly helps the prospects of cable as the top broadband technology, but nobody knows which broadband technology (cable, DSL, or satellite) will rise to the top in the next 10 years, or if any of the three will prove to be superior. Moreover, some new technology could emerge to displace all three. AOL has positions in the two broadband technologies but it had not make its biggest investment yet in them, not to mention its biggest investment of all time, until the announcement of today's deal! Take a look at the Compaq-Digital {CPQ} merger for an example of a mega-merger that crippled a growth stock. Broadband was a definite need for AOL, but they should not sacrifice their future for it. AOL would have been much better off working out some type of a cable deal with AT&T {T} or buying @Home {ATHM} as they were rumored to have been doing in 1999. Even a smaller cable company like Charter Communications {CHTR} might have proven to represent a more shrewd business play. Anybody with any further thoughts on this merger can voice their opinions by sending an email here.