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Wall Street History
https://www.gofundme.com/s3h2w8
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09/20/2002
AOL Time Warner
***Due to travel...Wall St. History will return Oct. 4.***
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
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