The America Online-Time Warner merger is an eye-opener, and not just because it will create a $350 million corporate behemoth. The real significance of the deal, which must be approved by U.S. regulators, is that it promises to transform media in the United States and will trigger change in the rest of the world, too. If all goes according to plan, this merger will yield the “all-in-one” media conglomerate that finally delivers on the promise of the broadband multimedia world.
The numbers are impressive. If it goes through, the deal will be the biggest corporate merger ever, and the resulting company will be the fourth-biggest in the U.S. The stock swap values the two companies at about $183 billion. (After the market’s initial euphoria at the announcement, share prices dropped, however, shaving $28 billion off the deal.) The new company will have $40 billion in revenues and $10 billion in gross profits. By offering Time Warner shareholders 1.5 shares of the new company for each share they currently own, AOL has effectively paid them a 70 percent premium. That is steep — nearly $100 billion in good will — but it is yet another victory for the “new media” companies and their paper-based wealth: Time Inc., founded in 1923, was the first weekly newsmagazine in the U.S. AOL is just 16 years old, but during that short life, it has grown from an outpost for computer geeks to a world leader on the Internet.
This melding of old and new companies has been long anticipated, but a simple practical matter has kept deals from being consummated: Finding a common way to value the two worlds has been difficult. Old companies use traditional measures of assets and liabilities to assess their worth; the new media use future earnings projections, and that is often pure conjecture, rather than hard numbers. There has been precious little overlap between the two — until now. This deal sets a benchmark for future mergers, and analysts are already picking out who the next likely takeover targets are.
Accounting principles aside, the merger pace will pick up because this deal transforms the media picture. One company can now offer customers content (Time, Fortune, Sports Illustrated, HBO, CNN and pickings from Warner Bros. studio, among others), a platform to receive it (the AOL interface) and the pipe that can deliver it into the home (the cable system). After the merger, the two companies will have a subscriber base of nearly 100 million people, and the content to entertain every member of the family. With a little tweaking, the distribution system will have been simplified, and access virtually guaranteed. In short, in one swift move, the Internet has been transformed from technology to mass media.
The emergence of this media giant is by no means guaranteed. Federal regulators must approve the deal, and it is precisely the synergy offered by the merger that worries industry observers. The chief concern — one that is shared by some U.S. lawmakers — is that AOL’s new access to cable TV lines will dilute its commitment to open access for all Internet service providers. Although there are a plethora of other Net content companies and many other forms of access, regulators will have to determine whether the new company unbalances the market. Approval is likely, but scrutiny will be intense.
The market’s scrutiny will be equally intense. The two halves bring distinctly different cultures to the table, and form a powerful contrast. Time Warner is the picture of buttoned-down elegance; AOL is tieless and aggressive, moving at Internet speed. The new company will have 82,000 employees, and guaranteeing that all the parts fit together — to the satisfaction of both management and shareholders — will be a huge challenge. Those difficulties were immediately evident: Mr. Thomas Middelhoff, chairman and CEO of Bertelsmann A.G., the German entertainment conglomerate, resigned from the AOL board because Time Warner is a competitor.
One wild card is Mr. Ted Turner, the iconoclastic founder of CNN who will emerge from the merger as the largest individual shareholder, with 4.5 percent of the new company’s stock. He supports the deal, and even though he comes from the Time Warner side, Mr. Turner mirrors the swashbuckling image of the Internet success stories. He could serve as a bridge between the two companies — or a key source of irritation.
Mr. Turner will be watching closely the value of his holdings. He has perhaps the most to lose as he swaps his valuable Time Warner shares for the speculative future earnings of the new company. If it delivers, he will be happy. But then, we all will be, as the Internet finally delivers on its promise of delivering a world to our fingertips, anywhere, anytime.
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