AOL: You’ve got Time Warner

Deal valued at $350 bil

Old media met new in a big way Monday as America Online announced plans to buy Warner Bros. parent Time Warner in an all-stock combination the companies valued at $350 billion — the first mega-deal of the new century and one of the biggest ever.

The agreement follows some posturing by AOL last year to launch a hostile takeover of Time Warner. AOL, prodded in large part by media fund manager and Time Warner shareholder Gordon Crawford, apparently agreed to abandon that idea in favor of talks about a more amicable deal.

Time Warner denies that AOL had considered a hostile takeover.

Billed as a strategic merger of equals, the agreement will nonetheless leave AOL shareholders with 55% of the combined company, paying for the deal with roughly $160 billion in stock. AOL topper Steve Case will be chairman of the new AOL Time Warner and Time Warner’s Gerald Levin will be CEO, running the day-to-day operations of the 82,000-person strong enterprise.

“Microsoft and GE — look out. Look in your rearview mirrors,” Case joked following a packed press conference Monday in New York.

Maybe they should. One objective of the merged entity, Levin said, “is to become the largest market cap company in the world.”

The biggest merger proposal to date is Britain’s Vodafone’s $129 billion hostile bid for German telecommunications company Mannesmann.

TW stock up, AOL down

Time Warner shares soared on news of the agreement, while AOL faltered. The agreement offers Time Warner investors 1.5 shares of the new company for each share in hand, which values the stock at well over $100. It closed Monday up more than 39% from Friday at $90.06.

AOL holders get a straight 1 for 1 exchange. Its shares fell 2.7% to $71.75 — one of the few losers in Monday’s kinetic market.

Both entertainment and Internet stocks jumped on the merger news as Wall Street speculated that more deals are on the way. Microsoft and Yahoo! could certainly afford to swallow a media giant, too, if they are so inclined.

Cable shares also soared. Execs said the deal validates the cable sector yet again and will help avert a war between cable and Internet providers over the issue of “open access,” which would give Internet providers access to high-speed services available over upgraded cable wires.

Both CEOs said they wrestled a bit with valuation and the terms of the deal in a market that habitually provides Internet companies with sky-high multiples. AOL makes up about 65% of the combined companies’ market capitalization. Time Warner, however, provides 80% of the overall cash flow.

While reaction on Wall Street and among industry insiders was generally positive, there was some griping in the AOL camp that the company had no particular need to link its stellar distribution and explosive stock to a slower-growth, traditional media company.

And Time Warner holders don’t all see why their company — with its varied content, big-name brands and sprawling cable systems — needed AOL, especially since that meant giving up control.

Case said the issue of who got the better deal is “this week’s debate” and pales in significance when one considers the longer-term prospects of the combination, which resolves a number of issues for both partners.

AOL, of Dulles, Va., gets a boatload of content in film, TV, publishing and music — plus access to Time Warner’s cable systems. The media conglomerate, forged a decade ago through the union of Time Inc. and Warner Communications, can save hundreds of millions of dollars and lots of time having to hash out an Internet strategy on its own.

“We’re the missing piece of each other’s puzzle,” Case said. He thinks shareholders of both companies should now sleep better at night knowing that all strategic gaps have been filled.

AOL chief financial officer Mike Kelly will be CFO of the merged group, which he said will boast revenue of $40 billion and cash flow of $10 billion. Synergies will save the combined company about $1 billion over a period of years.

Turner time

Time Warner vice chairman Ted Turner will be vice chair of the new entity. He’s the largest single owner of Time Warner stock, with about 9%, and said he happily voted his stock in favor of the deal. He’s even happier now. The value of his holding soared to some $10.6 billion on Monday from just over $6 billion Friday.

AOL chief operating officer Robert Pittman and Time Warner president Richard Parsons will become co-chief operating officers. A 16-member board of directors will include eight from each side.

A transition team including Parsons and Pittman, a former Time Warner exec and founder of MTV, will be working out further details of the new company’s corporate structure in the coming weeks and months. Case and Levin predicted smooth sailing with a rather large management team and combination of strong personalities.

“It gives me great pleasure to welcome the suits from Virginia to New York,” Levin joked, calling himself “a broadband person, an interactive guy.”

He called the corporate cultures rather similar and said he and Case have become close friends. Both Time Warner and AOL, he noted, are constructs that have grown rapidly through acquisitions in a relatively short period of time.

The union comes as media companies struggle to figure out how to harness the power of the Internet, deciding to spin off their few Web properties into separate IPOs on Wall Street; it also comes as Internet companies are increasingly looking to put entertainment and other content on their sites to attract more customers.

The combined company will create a media conglom with unprecedented reach across traditional and new media, allowing the delivery of programming from Time Warner’s stable of brands onto the Web and giving AOL access to Time Warner’s U.S. cable TV network to offer high-speed Internet access.

Power pact

AOL Time Warner will bring together Time Warner’s Time, CNN, Warner Bros., People, HBO, Sports Illustrated, Cartoon Network, Warner Music Group, Fortune, Entertainment Weekly and Looney Tunes brands with America Online’s AOL, CompuServe, Netscape, AOL Instant Messaging, Digital City, AOL Moviefone and recently acquired MapQuest services.

Indeed, a content-hungry AOL will be able to offer nearly unlimited branded content as well as access to it in ways never before possible:

  • AOL TV, an interactive TV service that enables AOL subscribers to access the Web, e-mail and popular chat services through a set-top box, will leverage Time Warner’s cable lines for distribution — possibly AOL’s biggest asset received from the merger — competing directly with Microsoft’s WebTV service. It has already invested $1.5 billion in Hughes Electronics to send AOL over satellite through DirecTV.

  • Time Warner’s filmed entertainment, like Warner Bros. studios, Warner Bros. TV and pay networks like HBO, will provide valuable original and marketable programming for AOL, as well as its high-speed broadband AOL Plus initiative bowing in the spring, opening the doors for more “Blair Witch”-style campaigns. Expect at the very least for Time Warner to push AOL’s movie ticket-buying Moviefone service.

  • Warner Music will mate a stable of established acts with AOL’s e-commerce capabilities. AOL reported earlier this month that 1999 holiday purchases by its members more than doubled, to $2.5 billion, snagging more than 60% of the $4 billion projected by Forrester Research to have been spent by all consumers shopping online during the monthlong holiday season from Thanksgiving to Christmas. Some think, in fact, that the deal could presage a long-awaited shakeup of the music division, which has been shedding market share for months.

  • Through AOL, Time Warner Digital now gains another distribution platform for its cyber efforts, including its three new hubs. Entertaindom.com, the first, was launched in November. AOL also gets the worldwide name recognition and resources of CNN.

  • The merger will also give Time Warner access to AOL’s telephony-based distribution platforms that connect AOL beyond the desktop, to TV screens, mobile phones and handheld computers. Partnerships will put AOL on 3Com’s Palm computing devices and Motorola’s new smart phones.

AOL could even preview clips of “The Sopranos,” the hit TV show by Time Warner’s HBO. In fact, the new partners announced a number of marketing and promotional agreements Monday to illustrate the synergies. They include AOL’s plans to add Time Warner’s InStyle magazine to its service. It already carries People, Teen People and Entertainment Weekly. AOL will also feature programming from CNN.com and Entertaindom.com. AOL Moviefone will take part in online/offline promotion of Warner Bros. films and related content.

As for Hollywood, the deal marks the first time a major dot-com has merged with a major media conglom.

“It was inevitable that the technical and Internet companies would make a statement that they needed content. It’s always pleasing when anything happens in the business world that creates more value for storytelling. It’s a validation of what we do,” Joe Roth, chairman of Walt Disney Studios, told Daily Variety.

Access issue

One TV industry insider, however, expressed concern over the potential that AOL might unfairly control access to broadband programming. “It’s incredibly Orwellian,” the exec suggested.

That the big buyer is AOL raises eyebrows for other reasons as well.

Only five years ago, AOL was considered a laughing stock, rumored to be heading toward bankruptcy and the butt of jokes regarding its slow service and seemingly stodgy Web culture. News Corp. was apparently offered the company on a platter, but passed. The Time Warner deal gives AOL the last laugh.

A major comeback has seen the company grow to 22 million subscribers. It’s a powerhouse that was able to acquire Internet browser Netscape and Moviefone, a player that’s now wheeling and dealing in a spending spree with a fickle entertainment industry.

Corporate coziness

AOL is one of the oldest and most conservative services online, and its approach to the ‘Net and its well-respected toppers are expected to help the merger with an equally corporate Time Warner.

CBS and New Line have already used AOL’s service to promote their television shows and theatrical releases, respectively. AOL’s marriage into the media space could see more of that down the line.

The Time Warner/AOL relationship isn’t new: Warner Bros. Online has been supplying AOL with content since 1994. The relationship ultimately led to AOL’s product placement sponsorship of Warner Bros.’ 1998 hit “You’ve Got Mail,” whose title is a takeoff on the AOL message that sounds when users receive e-mail.

While most AOL deals have content creators paying for space on the Internet service, AOL has been paying Warner Bros. Online for its sites — “Rosie O’Donnell,” “Friends,” “Jenny Jones” and “La Femme Nikita.”

Until now, Time Warner has not been a major player on the Internet, shuttering one of its few key properties, Pathfinder.com, to create Time Warner Digital and launch Entertaindom, the first of a handful of hubs, or portals, aimed at pushing its stable of popular entertainment, news and personal finance brands online. The new division also created a $500 million fund to invest in new media.

The conglom looked across its portfolio of ventures, made some major hires and promotions but apparently felt that it still didn’t fully understand cyberspace and needed a partner. It went for the gold. The merger provides Time Warner with a direct pipeline to AOL’s subscribership, the world’s largest for any dot-com. Entertaindom will now have a fixed space on AOL, as will the two other planned hubs coming from Time Warner Digital.

(Paula Bernstein and Charles Lyons contributed to this report.)

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