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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (30494)	1/20/2000 6:31:00 AM
From: IQBAL LATIF	Respond to of 50167

A different opinion from buy AOL/// A Merger Born of Desperation Wednesday, Jan. 19, 2000 08:06 PDT By Harold Vogel, America-iNvest.com Frequently written off into the dust heap of Internet history, the America Online (AOL) team has rebounded from adversity time and again through perseverance, foresight and intelligence as to how the public would likely use what has been essentially a glorified dial-up service. The AOL team has given fits to the other genius camp at Microsoft. And it has done it in such a way that all of the traditional media companies have been at wits? end in figuring how to compete with what has become a virtually ubiquitous presence. But even with all this good stuff, it seems that the managers at AOL sensed an upcoming turn to the downside in their projected rate of growth. Having largely conquered America in the dial-up era, the AOL bunch was being challenged in attempts to attain full broadband access to AT&T?s systems. It was starting to be nit-picked by a proliferation of free Internet service providers. And it was encountering market expansion resistance outside the United States. None of these would be fatal to the AOL service concept, but they sure as heck would have started to drag down the growth rate. Being as bright as they are, the AOL team members were running out of time to make use of their still premium-priced shares. Or so it seems from the outside. In fact, behind the scenes, they must have been feeling if not desperate, time-pressured. Had they not quickly done something to obtain the Time Warner (TWX) cable pipes and content, the magic moment would have passed, and AOL would have started to recede into the background to become the prey instead of the predator. Whose situation was more desperate in terms of time and performance, that of TWX or AOL? Clearly, it was AOL?s. It had much more to lose in terms of buying power and market perception once the prospective earnings growth rate began to slide down the usually slippery slope for companies that reach such size and scope. If you think about it, AOL had already harvested all the low-hanging fruit -- the millions of dial-up newbies ramping onto the Internet for the first time. Given AOL?s high multiple of cash flow (55 times pre-deal EBITDA), a decline from growth of 50% a year to a still very respectable 35% a year might have conceivably cut the AOL share price in half. And so, it is possible to conclude that as smart as the TWX people were in fantasizing and then internalizing all the potential synergy stories that could be spun, the only thing TWX had to do was ? wait. Six months or a year from now, a likely correction in the market -- combined with a slowing AOL growth rate -- would probably have given TWX the opportunity to buy AOL, instead of the other way around. In fact, this is the lesson for all of the other large entertainment and media companies: The large Internet valuations will likely remain relatively high for the foreseeable future. But they will not likely remain as relatively high as they are now, because as these companies (e.g., Yahoo!) mature and face greater competition and market fragmentation, they will find it more difficult to sustain the frisky pace of their early years. In other words, Disney, News Corp., Viacom, Seagram, etc. -- all of the shares bid up in last week?s frenzy -- are unlikely to be taken over any time soon by a new dot-com. TWX management was too hasty, too mesmerized by the AOL potential -- and probably not wise enough in the ways of the Street and in the history of valuation fluctuations. And it was not in the interest of the investment bankers to so educate them. In fact, even the AOL-TWX deal is not a foregone conclusion. Last week, the combined values of the companies actually declined to at or below where the values were the day before the announcement. Over the near term, the spin doctors will try to persuade investors that growth at the new AOL Time Warner will hardly falter from AOL?s previous growth rate. But if you believe that, I have a bridge to sell you. Note also that despite the premium ostensibly being paid by AOL, Time Warner shares retreated to around $80 -- only a few dollars a share above where the shares, sans takeover deal, were trading at last summer?s peak. Under these conditions, TWX shareholders should be underwhelmed by the AOL offer and might likely turn it down. The strategy should thus be to avoid or dump AOL and buy TWX, which provides more downside protection since it is now ?in play.? Should the deal fall apart, a possible good suitor waiting in the wings for TWX would be General Electric (GE). Harold Vog