- The Washington Times - Tuesday, January 11, 2000

America Online Inc., the world's leading Internet service provider, said yesterday it would buy media and entertainment giant Time Warner Inc. in the largest merger in history.

The new company, AOL Time Warner, will have a combined paying audience estimated at 294 million people worldwide through its cable, magazine, instant messaging, Internet service and Home Box Office subscriptions.

"This is the first time a major Internet company and a major media company have merged, and the possibilities are endless … in short, we're kicking off the Internet century with a unique company," said Steve Case, chairman of the new AOL Time Warner Inc.

"This merger will launch the next Internet revolution," he said at a meeting in New York City.

AOL, the 15-year-old home-grown Virginia Internet company, said yesterday it will pay $166 billion in stock and assume $17.8 billion in debt to buy Time Warner, the venerable media and entertainment giant with roots back to 1922.

The $183.8 billion deal exceeds Vodafone AirTouch PLC's $149 billion offer for Mannesmann AG.

The deal valued Time Warner stock at about $110 a share, 71 percent over its closing price Friday of $64.75 a share. It closed yesterday at $90.25 a share.

AOL shares fell $2.42 after rising early in the day yesterday to close at $71.31 a share, in part because AOL hooked up with a slow-growth company, analysts said.

The value attached to each company's stock affected trading. Time Warner shareholders will get 1.5 shares of the new company for each share of Time Warner stock they own and own 45 percent of the company.

AOL shareholders will get one share of AOL Time Warner for each of their current shares and together will own 55 percent of the combined company.

The alignment gives Time Warner a presence in the digital world through AOL's vast reach and gives AOL content from Time Warner magazines like Time and Sports Illustrated and television broadcasts from CNN.

Time Warner will market content to AOL's 20 million Internet subscribers, making it the world's largest Internet service provider.

Sterling, Va.-based AOL will get a new audience to market its service to Time Warner's 13 million cable-system subscribers.

Ted Turner, 61, the outspoken owner of 100 million shares of Time Warner, or 9 percent of that company's shares, yesterday compared his excitement over the deal to how he felt "when I first made love 42 years ago." Mr. Turner signed his shares over to the new company late Sunday.

The union of AOL and Time Warner must earn regulatory approval. An official at the Federal Trade Commission said yesterday it has not been decided whether it will be the Federal Communications Commission or the Department of Justice that rules on the deal.

"It's a unique combination of assets that they will have," said James Preissler, technology analyst at PaineWebber Inc. in New York.

But because the merger doesn't increase the new company's share of any one market they are in now, there's little reason to think the deal would fail to meet antitrust requirements, Mr. Preissler said.

The companies said they expect the merger to be complete before the end of the year. Announcement of the deal came 10 years to the day after Time Inc. and Warner Communications Inc. merged.

Time Warner had 1998 revenue of $26.8 billion, while AOL had fiscal 1999 revenue of $4.8 billion.

Their combined market capitalization will reach $335 billion and make it the fourth-largest U.S. public company behind Microsoft Corp., General Electric Corp. and Cisco Systems.

A Time Warner stockholder has already filed suit, arguing the merger undervalues her investment. In a suit filed against Time Warner in Delaware Chancery Court in Wilmington, shareholder Harriet Cohen contends the offer for the company is too low considering recent profit and potential for future growth.

Mr. Case, 41, said he called Time Warner Chairman and Chief Executive Gerald Levin, 60, in October 1999 to propose the merger, and both agreed they could leverage each other's size to help one another.

"When Steve and I first started our conversations, it became clear to me how I could accelerate our development and how I could accelerate AOL's development," Mr. Levin said.

Standing alone would be less profitable, Mr. Case agreed.

"If I'm an AOL stockholder, it's better to own 55 percent of the new company than to own 100 percent of AOL. And if I'm a Time Warner stockholder, it's better to own 45 percent of the new company than to own 100 percent of Time Warner," Mr. Case said.

The deal will cost AOL. The company will take about $150 billion in charges to earnings over two decades to account for its purchase of Time Warner, according to a Lehman Brothers Holdings Inc. estimate.

The purchase of Time Warner completes AOL's search for a way into American homes through cable lines, called broadband.

"This gives them a broadband strategy," Mr. Preissler said.

The search for access to broadband led AOL to team up with Comcast Corp. in April in a bid for MediaOne Group, a Colorado cable company.

MediaOne ultimately accepted a $54 billion offer from AT&T; Corp. on May 4.

In an age when Internet users are downloading more video and voice data than ever, high-speed broadband lines are increasingly viewed as a competitive necessity. Broadband moves more data more quickly than telephone lines can move information.

"It is the perfect one plus one equals three opportunity. We are the missing piece of each other's puzzle," said AOL President and Chief Operating Officer Bob Pittman, who will serve as co-chief operating officer of AOL Time Warner.

National consumer groups said yesterday the deal could hurt consumers.

Consumers Union, Consumer Federation of America, Media Access Project and the Center for Media Education said the merger could give AOL Time Warner and AT&T; control of more than half of the nation's cable lines.

That's important because the federal government hasn't ruled on open access a debate over whether cable lines should be available to all Internet service providers.

"We will immediately ask the Federal Communications Commission to initiate a rule-making proceeding to require open access to the Internet," the group said in a statement. "We will also ask the FCC to review its new ownership rules, which could enable AOL Time Warner and AT&T; to preserve anti-competitive ownership ties of cable companies that serve more than half of all consumers and control the most popular cable TV programming and Internet services."

But Mr. Case and Mr. Levin said yesterday they intend to open their cable lines to competitors.

"What you're going to see is we will take open access out of Washington and out of city hall," Mr. Levin said.

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