Time Warner, AOL to Merge

Time founder Henry Luce once dubbed the twentieth century "The American Century." This morning, AOL Time Warner's proposed new chairman, Steve Case, ushered in "the Internet Century." In an unprecedented blending of traditional and online media, Time Warner and America Online announced an all-stock merger of a company valued at over $300 billion.

Time Warner stock exploded in early trading on the New York Stock Exchange, rising to $96.25, an increase of 49 percent over Friday's close. AOL shares, on the other hand, ticked slightly higher to $76.4375, just 3.6 percent higher than Friday's figure.

AOL Chairman and CEO Steve Case will become chairman of the new company, while Time Warner Chairman Gerald Levin will serve as its chief executive. Time Warner shareholders will receive 1.5 shares of the new company, while AOL shareholders will receive one share of the new company for every one they currently own, a deal that would appear to undervalue the market worth of AOL's shares. AOL shareholders will own about 55 percent of the new company, while Time Warner shareholders will receive some 45 percent.

In a conference call with analysts this morning, AOL and Time Warner executives stressed the global reach of both companies, as well as the potential synergies of combining their properties. In its first year, the combined company would have revenues of $40 billion, and earnings of $10 billion before taxes, depreciation and amortization, according to the officials. They added that combining Time's print subscriptions, AOL's membership, and paid TV subscribers to HBO gives the combined company a global subscriber base of more than 100 million, easily the largest of its kind worldwide. Hence, the merger will "blow the roof off our advertising and commerce potential," predicted AOL COO Bob Pittman, who becomes co-COO in the new entity.

The proposed merger reflects an urgency within Time Warner to step up and solidify its Net presence. In the post-Pathfinder universe, Time Warner executives announced plans to offer five "hub" portals centered around topics like sports, news, finance and entertainment. But only one of those, Entertaindom, has actually come to light. By merging with AOL, Time Warner inherits an audience of millions of customers who are willing to pay monthly fees for, say, stock and finance information; now they will presumably also gain access to the online material offered by Fortune, Money and CNNfn.com.

For AOL's part, the deal helps to secure access to a broadband universe. The company has struggled with AT&T and others to find a way to enter its customers' households at faster speeds. Because Time Warner has tens of millions of cable subscribers, AOL has ensured itself a premium delivery slot on Time Warner's Roadrunner cable modem service. Another motivation, suggests one company executive, is that AOL has little room for internal organic growth, and that merging with Time Warner represents the ultimate business ratification for AOL executives. "I can't imagine that Steve Case ever dreamed he would be the chairman of Time Warner."

The notion of the merger is not altogether new. In the fall of 1998, in light of a content deal between AOL and Time Warner's People magazine, a Time Inc.

New Media executive was asked about the possibility of the company buying AOL.

He responded that AOL's market valuation was too high, but that observers should "stay tuned." Of course, AOL now has a market capitalization that is billions of dollars higher, having acquired Netscape and several smaller Net companies since then.

AOL claimed that the privileged treatment it would now receive from Time Warner's high-speed access cable systems would not change the company's stance in favor of high-speed cable operators opening their pipes to a variety of providers. "I have, and the company has, always believed in consumer choice," Case asserted. "We are looking forward to being on the cable platform, and we expect to have many competitors on the cable platform." He predicted that both AT&T and Time Warner, the nation's largest and second largest cable companies, respectively, would commit themselves to open access.

Another area that executives repeatedly stressed is streaming video. Time Warner's video holdings are extensive: In addition to the Warner Bros. archive of film and animation, the company also controls CNN and Turner's broadcasting assets, as well as HBO and a very successful television production operation.

If AOL could introduce workable and simple-to-use streaming video to its millions of users, the combinations would put the company well ahead of competitors like Disney and News Corp. "What this transaction has hidden just underneath it is that we will have both the platform to distribute [streaming video] and the brands," Case boasted.

According to the executives, the idea for the merger hatched in October, when Case called Levin and suggested that they merge, with the very titles that were announced today. Subsequent discussions focused mostly on "management issues," according to Case.

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