AOL Time Warner
Brian Trumbore
President/Editor, StocksandNews.com

Last week, AOL Time Warner CEO Richard Parsons hinted that the grossly underperforming online division may be dumped at some future date. An incredible thought, given the history of the merger that combined AOL and media giant Time Warner back in January 2000. Since then, the news has been nothing but dreadful, capped off by the ongoing investigation into revenue generation practices at the online operation. Oh, don't you know there was so much of that going on in the whole Internet sector. And to top it all off, Wall Street's analyst community simply went along for the ride, or flat out encouraged the behavior.

Well, I happened to save a few articles from the announcement of the merger back in 2000, as well as after, so let's look at some of the comments that were being made then. After all, this is Wall Street history.

The merger was announced on January 10, 2000 and at the then share prices for both partners, the deal was initially valued at $184 million, making it the largest merger ever. Time Warner was to receive 1.5 shares of the new company, which was about 70% more than the closing price of Time Warner stock the day before the announcement. By the end of the first day, AOL was trading at around $75 and Time Warner $95 (with a proposed merger value of about $110 per share).

Here are some of the comments following the big news. I'm leaving out most of the analyst names since they aren't well known.

"One of the holes for AOL has been how it would get into the broadband game?(Time Warner) will now be the only media company that has Internet, cable, broadcast TV, magazine and print assets. No one else can offer that bundle of assets to an advertiser."

"AOL customers want all that content, so to give them access to Time Warner's base of entertainment is a natural."

From a Bloomberg report: "Having access to Time Warner's cable lines and content will help America Online in its efforts to develop Internet-television service?AOL has been working on a service that will let people send e-mail and chat online while watching television."

"It resets the rules for a lot of companies. (G.E., Disney and Yahoo!) will all be rethinking their strategies. I see possible combinations, with Yahoo looking at Disney or CBS-Viacom."

[Ed. Goodness, gracious?we were such idiots back then.]

"My concern as an investor is what's the revenue growth. It will be slower from an AOL standpoint."

"The merger of America Online and Time Warner represents not only the triumph of the Internet as the irresistible force in business, but a vision of the Web as a mass-marketed, middle-of- the-road medium for Main Street America." [Steve Lohr / New York Times]

"America Online is clearly dominant," said an analyst at Thomas Weisel. "The nerds have won. This deal really validates the Internet."

AOL chairman Steve Case: "It's not about technology, it's about making this a mass medium and becoming part of the everyday habits of ordinary consumers."

Time Warner chairman Gerald Levin: "I accept that something profound is happening in the Internet space - I believe that. The new media stock market valuations are real - not in every case, of course. But what AOL has done is get first position in this new world. Its valuation is real, and I am attesting to that." [New York Times]

A Harvard Business School professor: "The biggest threat to AOL over the next three years was getting locked out of broadband. And this deal certainly helps solve that problem."

In December 2000, the Federal Trade Commission approved the merger, but by then AOL's share price was $50 and Time Warner's $74. It still needed the approval of the Federal Communications Commission to be official, but with the FTC's approval, a Wit Soundview analyst said, "There's a lot of room for them to increase market share. This is the one company that I'm very confident will meet analyst expectations." [He had a 12-month price target of $80.]

The FCC then blessed the takeover on January 11, 2001 and the merger closed that day. AOL was at $47, Time Warner $71, valuing the merger at about $110 million, down from the initial price tag of $184 million.

After final approval, Chris Dixon, a UBS Warburg analyst said, "The real power of AOL Time Warner is to develop the applications, which are going to be a daily part of this digital age. It's not going to happen overnight; it's going to take three to five years to develop."

The Washington Post had an interview with an AOL shareholder and software developer at this same time. "As an AOL investor, I have concerns about all of what we have with Time Warner. That's not our business. I'm hoping that the guys they put in charge know what they're doing." [Doh!]

Finally, from an editorial in the Financial Times, January 14, 2001.

"?the scope to generate large new revenue streams is doubtful. Extremely profitable businesses on the Internet are rare because competition is rife and barriers to entry are low. If AOL Time Warner comes up with a great idea, it must still price aggressively or someone else will produce something similar for less."

[As of this writing, shares in AOL Time Warner are about $12.50.]

Brian Trumbore