What's AOL Time Warner Worth?

The general press threw a blowout bash for America Online Inc. and Time Warner Inc.'s new deal. But as business scribes pick through the post-party scene, they're digging up real questions about the worth of AOL Time Warner as an investment.

Business Week Online's Sam Jaffe can't figure out why AOL wants to tinker with its successful gig as a content aggregator. How could AOL integrate Time Warner's valuable properties, such as Sports Illustrated, Fortune and Money, with content such as CBS SportsLine and Bloomberg, already featured on its site? Without its content partners, Jaffe pointed out, AOL loses content fees.

And with the ghost of free access threatening AOL's monthly cash cow of $5.2 billion in member fees, this is no time for income streams to be drying up.

Assigning a stock value to the new beast is raising an even peskier set of questions. According to SmartMoney.com, Merrill Lynch analysts Henry Blodget and Jessica Reif Cohen teamed up to suggest $84 a share as a value for the new company based on 2002's projected combined cash flow. That assigns a slower 50 percent growth rate for AOL's current share of the cash flow, and a goosed-up 15 percent growth rate for Time Warner's share. It also assigns AOL's current multiple-to-cash-flow (about 30). Federated Investors senior investment analyst Michael Tucker is less enthusiastic about growth. He handicapped a standalone AOL's revenue growth at 32 percent to 35 percent over the next two to three years, down from the caffeined-up 50 percent growth it had been experiencing, according to TheStreet.com's George Mannes. But with Time Warner on board, Tucker sees growth skidding to 13 percent to 16 percent.

The Wall Street Journal surveyed the rout of the companies' stocks over the last two days and speculated that it's partly due to AOL Time Warner's rise in an old-fashioned form - the conglomerate. Conglomerates like AOL Time Warner have been out of style for years, the Journal pointed out, so few analysts know how to size one up. For their part, analysts think investors are scrutinizing the merger and catching a nose full of the hot air in Netco valuations.

"[S]harp investors are starting to realize that companies like Yahoo can't justify being traded at 400 times earnings, or stock-price targets of $500 a share, when Yahoo's actual annualized earnings are at just about 75 cents a share," Robert Olstein, manager of the Olstein Financial Alert mutual fund, told the Journal. To Olstein, the stock drops are "a signal to the Street that the basic valuation model of ISPs is a thing of the past." Ouch. The light of day can be painful.

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