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AOL Buys Time Warner for $162B

January 11, 2000

LOS ANGELES (AP) _ The premier fusion of new media and old _ America Online and Time Warner _ may herald other alliances between the keepers of content and Internet companies with the means to deliver it.

Disney, Sony, News Corp. and other media giants may look to strike similar deals with online companies to catch up in the Internet race in the wake of Monday’s announcement that AOL would acquire Time Warner Inc.

``Temporarily, maybe it leaves them in the dust,″ Dan O’Brien, an Internet analyst with Forrester Research, said of Time Warner’s competitors.

The $162 billion stock deal aligns a company with 22 million online subscribers and a venerable conglomerate whose news and entertainment fixtures include Time magazine, CNN and cartoon characters Bugs Bunny and the Roadrunner.

The deal would be the biggest corporate merger ever and put the new company, AOL Time Warner Inc., at the forefront of integration between Internet providers and entertainment monoliths.

To keep up, analysts said, other Internet and media companies likely will have to follow suit.

``There’s a trend toward Internet companies partnering with traditional media companies,″ said Mark Mooradian, an analyst with Jupiter Communications. Time Warner and AOL ``is the pinnacle of that kind of partnership in the making, but I definitely think we’re going to see more of this.″

On the technology side, there’s companies such as Yahoo, Lycos, AT&T and Microsoft that may be on the lookout for mergers or other deals with entertainment providers. On the studio side, there’s Disney, Sony, News Corp., which owns 20th Century Fox, and Viacom, which owns Paramount and has a merger deal with CBS television.

Other prospects for acquisition include General Electric’s NBC television and MGM, a studio that is a mere shell of its glory days but which has a top-notch film library.

Besides gaining content, Internet companies with huge paper value but few tangible assets can insulate themselves from stock volatility by merging with traditional entertainment companies and their harder assets, said David Davis, an entertainment analyst with investment banker Houlihan Lokey Howard and Zukin.

``You’re talking about nouveau riche companies that went from zero market value to $100 billion in a few years,″ Davis said. ``Look at AOL and the volatility of the stock in the last year. It doubles, then falls in half. Over the long haul, they want to create stability in the stock.″

Other studios will need to expand their Internet connections as the World Wide Web continues to develop as a medium for entertainment distribution, analysts said.

``AOL wanted to get more global. Now that they’re armed with all those Time Warner brands, it increases their chances of being successful,″ said Larry Petrella, analyst with Lehman Brothers. ``Arguably, that hurts everybody else a little bit.″

Among the new company’s competitors, outright acquisitions and mergers are possible, along with lesser steps such as partnerships with Internet outfits. Entertainment companies also may look to buy up smaller Internet providers to continue growth of their online businesses from within.

Like other media conglomerates, Time Warner had been working to reinvent its Internet strategy internally, setting aside $500 million last year to invest in new online efforts.

With its acquisition of Internet portal Infoseek, Disney is trying to build up its presence on the Web. A Disney spokeswoman said the company would have no comment on whether the AOL-Time Warner deal would affect its own Internet plans.

Disney, its stock slumping as earnings plunged 28 percent last year, could become an attractive takeover target for technology companies, O’Brien said. The company has been slow to recognize the value of pushing its entertainment content over the Internet, he said.

``Traditional media companies have had a hard time understanding the dynamics of the Web,″ O’Brien said. ``It’s not just a matter of digitizing your content, setting up a site and expecting people to beat a path to you door. It doesn’t work that way.″

Besides Time Warner’s movie, music, television and publishing businesses, AOL gains access to the entertainment company’s network of cable TV lines. Time Warner’s cable operations reach one-fifth of U.S. households and are second only to AT&T’s.

Steve Case, chairman and chief executive of America Online, will be chairman of the new company, to be called AOL Time Warner Inc., and Time Warner chairman Gerald Levin will be chief executive. America Online shareholders will own 55 percent of the company, and Time Warner shareholders the rest.

Time Warner vice chairman Ted Turner, who owns 9 percent of the stock, will retain that title in the new company.

Time Warner was formed 10 years ago, combining the entertainment company that grew out of Warner Bros. movie studio with Time Inc., whose flagship magazine Time was founded in 1923 by Henry Luce. Time Warner bought Turner’s cable company TBS in 1996, which included the all-news channel, CNN, to add to Time Warner’s cable lineup of HBO and Cinemax.

AOL has been no stranger to deals itself since being formed in 1985. Last year it acquired Netscape Communications and MovieFone, and it also bought online competitor CompuServe and a stake in Hughes Electronics, a maker of electronic equipment.