SAN FRANCISCO (01/26/2000) - Another day, another $20 billion media merger.
It seems Time Warner Inc. couldn't wait for its deal with America Online Inc. to close before going on a shopping spree for the British-based EMI, a longtime object of takeover talk.
While corporate executives on both sides of the Atlantic touted the virtues of the $20 billion merger, American shareholders have thus far been skeptical.
Even the promise of 3,000 job cuts - normally sweet music to Wall Street's ears - was not enough to keep both AOL and Time Warner's stock from slipping Monday.
It's never wise to take a single day's trading as a specific rejection of a deal's strategy. And the Dow suffered in general on Monday, falling 244 points - or more than 2 percent. Still, shareholders appeared to be asking Time Warner and AOL's management a question: What's going on here?
Everyone agrees that digital distribution of music is where future growth will be. But when, and how fast? Most sober projections do not show online music sales comprising even 5 percent of record sales for the next several years. And what will the delivery platform be for distributing music via AOL Time Warner?
The pieces, certainly, are in place: AOL owns the reasonably successful Web music sites Spinner and WinAmp; Time Warner now has the world's largest music label, plus half of Columbia House and its proposed subsidiary CDnow.
But can those pieces work together? Conventional wisdom held that the AOL-Time Warner merger faced few regulatory hurdles, but Monday's announcement raises the bar. British newspapers have been quick to point out that other music giants, including Sony and News Corp., will make their voices heard on this proposed merger. The combined companies' more than 25 percent market share in many countries is bound to be a target for U.S. and European regulators.
Consider the still-pending acquisition of online music retailer CDnow by Columbia House, the record club jointly owned by Time Warner and Sony.
Presumably, CDnow would be a key component in any music distribution system AOL Time Warner establishes. But the merger has already been delayed by a Federal Trade Commission investigation, on concerns that Sony and Time Warner have engaged in an anticompetitive practice known as imposing a "minimum advertised price" that artificially keeps CD retail prices high.
The fact that Time Warner is now proposing to add another mammoth record label to its stable is hardly likely to assuage the FTC about its benign intentions.
One FTC representative was tight-lipped about the effect the Warner-EMI merger would have on the CDnow acquisition (as well as whether the deal would come under the agency's microscope). But another FTC source acknowledged the Warner-EMI merger "could significantly affect" the CDnow deal. Indeed, the European Union, which only approved the CDNow purchase last month, could now reopen its own investigation.
Probably the broadest question is whether the long-suffering EMI is a property that shareholders want to see attached to their bottom line. The record business - which, remember, AOL shareholders did not think they were part of until two weeks ago - is notoriously volatile. Lose a good act, or have one of your stars record a poorly-selling album, and the entire year's earnings may be erased. That's not the business model for which most AOL shareholders signed up.