Merger hangover

Street analyzes AOL/TW shares back down to Earth

NEW YORK — The market euphoria that first greeted news of the landmark America Online/Time Warner merger plan diminished Tuesday as a wave of mixed messages emanated from Wall Street.

After soaring by nearly 40% Monday when the deal was announced, Time Warner shares backed down, easing 6.6% to close at $86.12. Credit Suisse First Boston cut its investment rating on the company to “hold” from “buy” due to Monday’s run-up, even as PaineWebber boosted its price target on the company to $170 from $90.

As for AOL, the stock continued to lose ground, dropping 11.4% to close at $64.37. Schroder & Co. downgraded AOL to “outperform” from “significant outperform” and lowered its year-end price target to $85.

“Despite our enthusiasm for the transaction … the company is clearly a far different AOL and, therefore, AOL’s prior valuation metrics do not seem appropriate,” the firm told its clients.

Biz stox tumble

Having all jumped Monday in anticipation of more deals to come, entertainment stocks like News Corp., Viacom and Disney, as well as cable stocks including Comcast, Cox and Cablevision, were also mostly lower — despite continued speculation that the floodgates have opened and more deals involving content players and Internet groups are likely.

The issue isn’t the strategic benefits of the merger for AOL or for Time Warner — those are clear. The question is one of valuation, Wall Streeters said. Internet stocks tend to be valued very highly for the most part based on future earnings. Traditional media stocks, on the other hand, are valued for current performance. “Clearly, investors will increasingly have to struggle with metrics for traditional media/Internet hybrids,” Schroder said.

Uneven road ahead

Until then, stocks could have a bumpy ride. Time Warner is likely to regain some ground, since the merger values the conglom at more than $100 a share. AOL could stay under some pressure, especially since it hit investors on Tuesday with the news that the company is going to issue lots of new shares to pay for its acquisition.

AOL and Time Warner’s $160 billion deal will create a media/Internet giant valued at some $350 billion. AOL will own 55% of the combined company, to be called AOL Time Warner. Time Warner shareholders will retain 45%.

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