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Carving new domain

AOL, TW: A marriage made in Web heaven

NEW YORK — Monday, the Internet gave showbiz two big thumbs up – and vice versa.

Gerry Levin looked at the future and saw that it was digital. Having built the pre-eminent collection of content assets, he has found the ideal marriage partner in America Online, a company that had early on grabbed the “first mover” advantage by applying an old-fashioned business concept to the bright new world of the Internet: actually charge a fee for its services.

Time Warner got it. Its management had been gearing up to remake its highly tuned old-media distribution systems along digital lines. Before AOL loomed on the horizon, TW had been prepared to face the profound challenge represented by the Internet.

If over the next five years, Time Warner had — on its own — spent billions of dollars, totally reorganized its management structures and executed perfectly, it just might have ended up a strong No. 2 to AOL. Sources suggest AOL may have approached this marriage with a shotgun, but if so, it was disarmed by Levin.

Monday’s breathtaking announcement, whether or not as voluntary as all the smiles would indicate, has saved all the sidelines observers those five years of suspense.

Let’s get the issue of valuation out of the way. Is Time Warner worth $128 billion? Is AOL worth $185 billion? Is the combined company worth $313 billion? Astounding as these numbers are, that’s what the market is telling us. For once, its judgment appears to be utterly logical, if a tad exuberant.

Remember, the deal gives Time Warner shareholders a whopping 70% premium over the valuation the stock market thought appropriate Friday — assuming no change in AOL stock price. Roy Furman, vice chairman of ING Barings and an unwavering believer in media stocks, expressed this view: “This is a brilliant breakthrough illustration of the inevitable convergence between traditional and new media. The deal shows that content is undervalued, as the Street has never rightfully perceived its true worth.”

As to whether the Internet is overvalued, only time can tell. Steve Case, AOL’s CEO and the anointed chairman — but not CEO, that’s Levin — of the merged company, put it most succinctly in an early morning conference call for financial analysts: “It is better for AOL shareholders to own 55% of the combined company than 100% of AOL; it’s better for Time Warner shareholders to own 45% of the combined company than 100% of Time Warner.” This appears to be true in the short and medium run — and probably in the long run, too. This is the kind of deal that could give that much-abused child, synergy, a good name.

Corporate mergers tend to fall into one of two categories: offensive and defensive. This one is both. While TW’s content assets are truly evergreen, it is its distribution systems that the Internet had placed in jeopardy. This morning, the CEOs of every other media company must be throwing out their Internet playbooks; at the same time, they are basking in the higher valuations that this deal puts on their companies. Manny Gerard of Gerard, Klauer Mattison has been shrewdly handicapping the entertainment scene since Eisenhower was president. His view? “This is Gerry at his most brilliant. The Internet companies are discovering: It’s the content, stupid.”

Is there anyone in the financial community with a word to say against the deal? Not really. One of AOL’s Internet competitors sighed, “I wish I could be critical of the deal, but I can’t.” Even David Wetherill of CMGI, who shot down Barry Diller’s hopes of merging USA Networks’ content with Lycos’ Internet capabilities, opined that the merger was good for all concerned.

Keith Benjamin, until recently a top Internet analyst at BancBoston, Robertson Stephens and now a general partner at leading VC Highland Capital, did express some mild disappointment that he wouldn’t get to see AOL realize the phenomenal growth rates in cash flow he envisioned for it. “The deal is more than fair for Time Warner, and marginally fair for AOL.”

Coming from an unreconstructed Internet bull, the type who generally hates the idea of an Internet star merging with a mere media company, this ranks a strong endorsement of the deal.

Indeed, Time Warner’s audacious move validates the stock market valuation of at least the most legitimate of Internet companies. Time Warner, by agreeing to be bought by AOL, has bowed before the onslaught of the digital revolution. AOL, which reported its first profitable year less than six months ago, will own the mightiest collection of copyrights, media distribution systems and entertainment franchises ever assembled.

This unique pool of assets that Gerry Levin put together made TW into, in AOL’s eyes, the prettiest girl in town.

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