- The Washington Times - Wednesday, January 12, 2000

Union of the titans

In the largest corporate merger in history, America Online Inc., the Virginia-based Internet service provider that did not exist 15 years ago, will purchase Time Warner Inc., the world's largest media and entertainment company, whose roots date to the founding of Time magazine more than 75 years ago. AOL will pay about $165 billion in stock for Time Warner and assume $18 billion in debt, making the $183 billion purchase price by far the biggest in history. AOL stockholders will own 55 percent of the new company, AOL Time Warner.

The buzzword that surrounded the announcement synergy was the same buzzword that always makes itself present when most big mergers are announced. The combination of the two is supposed to generate a conglomerate that is more powerful and valuable than the mere sum of its parts. Time Warner, which has failed in its efforts to assimilate the Internet within its empire, will draw on AOL's expertise. Meanwhile, AOL will have access to Time Warner's massive entertainment content (movies, music, magazines, cable channels, books) to share with AOL's 22 million Internet subscribers. Time Warner's cable systems, which have 13 million customers, will also give AOL access to high-speed Internet connections.

But synergy is always easier to project than to exploit, a fact that Time Warner knows far better than most corporations. After Time Inc. merged with Warner Communications in 1989, for example, the much-ballyhooed growth and success never materialized. And the biggest developments that emerged from Time Warner's 1995 merger with Turner Broadcasting were the multiple lawsuits that flowed from the "Valley of Death" broadcast on CNN's "NewsStand," a collaborative effort between CNN and Time magazine that claimed the U.S. military dropped lethal sarin gas and assassinated American defectors at a North Vietnamese military camp inside Laos in 1970.

By far the most astonishing development in the world's biggest merger is the fact that AOL, a high-flying "new media" enterprise that has only recently begun to earn significant profits, has managed to purchase one of the giants of "old media," which has been steadily building itself over decades. Indeed, Time Warner's sales are more than five times AOL's. What made AOL's purchase of Time Warner possible was the stratospheric price of AOL's stock, which is trading at more than 200 times its earnings. (Historically, stock prices have been about 14 times earnings on average; in the current bull market, Dow Jones industrial stocks are trading at 25 times earnings.) Before the merger, AOL's market capitalization was a mind-boggling $164 billion, dwarfing Time Warner's $97 billion. AOL, moreover, is hardly buying Time Warner on the cheap. Because the stock transaction will value each share of Time Warner at $110, AOL will be paying a staggering 71 percent premium for Time Warner shares, which closed Friday below $65.

AOL, which earns its revenues by charging its customers $22 per month for access to the Internet, may soon encounter some choppy waters. There are now companies that provide access to the Internet for free. AOL, arguing that its customized service is worth the price, claims it is not concerned with this trend. However, how much longer will the millions and millions of AOL customers who do not waste endless hours in AOL's chat rooms continue to pay more than $250 a year for a service other companies are giving away? It's difficult to imagine such intensifying competition not affecting the price of AOL Time Warner stock.

There can be no doubt that the Internet revolution is for real. Nor is there any doubt that AOL and its visionary leader, Steve Case, who will become chairman of AOL Time Warner, played crucial roles during the early stages of that revolution. Equally clear is the fact that the consumer will surely benefit over the long run as high-speed Internet access becomes the industry standard and as Internet content multiplies. Whether AOL Time Warner meets its challenges, exploits its union and emerges as an indisputable winner in the Internet sweepstakes of the 21st century has yet to be determined.

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