- The Washington Times - Wednesday, January 12, 2000

The creation of AOL Time Warner Inc. could spark a buying frenzy between Internet companies and old-line media companies, with the upstarts in the driver's seat.

AOL's purchase of Time Warner could cause other tech companies to follow suit and make bids for media companies or let Internet companies play one media company off another as they weigh merger offers, analysts said.

Not only could the deals be plentiful, they also could be enormous. Monday's merger was valued at $183.8 billion, the largest to date.

Similar deals could begin taking shape in three months, some analysts predicted.

"With something of this size, it gives people a lot more confidence. No deal is too big now," said Bob Kipps, senior vice president of McLean-based investment banker Houlihan Lokey Howard & Zukin.

Deals could take shape as Internet companies try to leverage their distribution and their reach to millions of Web users and as media companies look for more outlets for their content.

Technology stocks fell again yesterday, but they still have strong currency in the form of strong market capitalization. Tech stocks rose Monday after the merger announcement of AOL Time Warner, which will be based in New York and trade under the stock symbol AOL, because it led to speculation that other tech companies could follow AOL in making landmark deals.

But stock of AOL, which is expected to keep its operational headquarters in Sterling, Va., and keep the 2,500 employees who work at the campus now, fell when investors determined attaching a high-growth tech stock to staid media giant Time Warner would slow AOL's earnings growth, Chicago-based William Blair & Co. analyst Abhishek Gami said.

Fast-growing Internet companies can use their market capitalization to offer stock and make deals with media companies that can provide them exclusive content and help them make the transformation from a pure Internet company to a media company with a broader reach, Mr. Kipps said.

"When you compare who can be more aggressive, the market caps of the Internet sector are so high, it allows them to be more aggressive," he said.

One potential target of Internet companies could be General Electric's NBC television.

Rumors have circulated before about the fate of NBC.

Mel Karmazin, chairman of broadcast giant CBS Corp., said in February he would be willing to "overpay" to buy rival NBC from General Electric.

Disney, which owns ABC and bought Internet portal Infoseek in July to boost its presence on the Web, may make another purchase following the AOL Time Warner creation.

"I suspect they will be involved in some kind of large transaction. [Disney Chairman] Michael Eisner has that type of ego. He wants to stay on top," Mr. Kipps said.

But Disney, its stock slumping as earnings plunged 28 percent last year, could become an attractive takeover target for technology companies, said Dan O'Brien, an Internet analyst with Forrester Research.

Yahoo Inc., the Internet search service, also could be among those looking for a media partner.

"I think there will be a race on to grab the best properties on both sides," Mr. Gami said. "The AOL Time Warner merger puts pressure on the industry to speed up mergers."

A handful of mergers already have occurred.

Disney bought Infoseek.

Disney bought Cap Cities/ABC Inc. in February 1996.

Viacom bought CBS in September.

"I'm not sure it will [increase the number of mergers]. I may be in the minority in that, but companies are constantly reassessing their strategic plans and we've seen a number of deals already," said Morton Pierce, chairman of the mergers and acquisitions practice at Dewey Ballantine, a New York law firm.

The cause of the potential merger wave partially is the desire to catch up to AOL Time Warner, analysts said. The new media company would have an estimated 294 million subscribers to magazine, cable, Internet and other services.

"I think every company that said they are a competitor of AOL has to figure out how they counter this move," Mr. Gami said.

But AOL Time Warner is so big, it is unlikely they will catch it.

"It's a battle for the No. 2 and No. 3 spot," Mr. Gami said.

While the AOL-Time Warner deal was an eye-opening event that certainly will prompt companies to try replicating it, not everyone believes copycat mergers will happen quickly.

"I think other acquisitions will occur much slower than people think. It's more of a longer-range phenomenon than a shorter-range phenomenon," said Michael J. Geran, an analyst at Pershing, a division of Donaldson, Lufkin & Jenrette Securities Corp. in Jersey City, N.J.

AOL fell 11.4 percent, or $7.31 yesterday, to $64 a share on the New York Stock Exchange.

Yahoo Inc. shares fell 8.8 percent, or $38.56, to $397.50 a share on Nasdaq.

CMGI Inc., which owns Internet search service AltaVista, fell 8 percent, or $24.62, to $281.87 a share on Nasdaq.

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