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America Online, Time Warner Propose $163-Billion Merger

Media: Record business deal would meld old and new communications giants that have myriad contacts with consumers. It may unleash a torrent of similar transactions.


In an audacious deal bringing together traditional entertainment and the new world of the Internet, America Online and Time Warner Inc. on Monday announced they will merge in the largest business transaction in history.

The $163.4-billion merger would combine the most successful brand name on the Internet with the world's largest entertainment company, whose brand names include the Warner Bros. studio, the WB television network, HBO, CNN, and Time Magazine. Time Warner is also the nation's second-largest cable systems operator, providing AOL with sought-after access to the vaunted high-speed pipeline into American homes.

It is the first purchase of a major media company by an Internet company. Such a transaction has long been anticipated but was hampered because of uncertainties about the real values underlying the often euphoric trading of Internet stocks.

Many in the investment community believe the AOL-Time Warner deal could presage a torrent of similar transactions, with such well-known names as the Walt Disney Co., Yahoo, and Viacom and CBS (which are themselves in the process of merging) prompted to seek complementary partners.

On its own terms, the proposed deal creates a critical mass of about 100 million customers, including AOL's more than 20 million Internet subscribers, Time Warner's 12 million cable customers, and the Time publications' 28 million subscribers--whose attention spans could be sold en masse to advertisers around the globe.

"This is a perfect fit as a unified entity," AOL Chairman and Chief Executive Steve Case told an audience of Wall Street analysts shortly after the deal was announced Monday morning. "No company will be better equipped to capitalize on the convergence of media, entertainment and communications."

AOL and Time Warner executives said the deal could take nearly a year to complete. That could add some risk to the merger, given the volatile price swings of AOL and other Internet companies' high-flying stocks. Some analysts question whether the active traders who are AOL's shareholders will bail out if the stock declines or begins trading more like a traditional media company.

Moreover, questions about how the cultures of the two companies will mesh are inevitable. At a news conference Monday launching the merger, Time Warner Chairman and Chief Executive Gerald Levin appeared ostentatiously tieless, as though to signal his solidarity with what he called the "hip and socially minded" culture of AOL.

But others noted the contrast between Time Warner's bureaucratic culture and AOL's storied aggressiveness in the fast-changing Internet space.

Case said since the two chairmen began discussing a combination this fall, he has tried to impress upon Levin the need to operate the new company at "Internet speeds."

Under the terms of the deal, AOL's Case, 41, will become chairman of the merged entity, which will be known as AOL Time Warner and trade on the New York Stock Exchange under the ticker symbol AOL. Levin, 60, will become chief executive of the new company.

Complexity of 2 Firms May Present Challenge

The deal raises fresh concerns about the increased concentration of information media as well as the combined ownership of information sources and distribution networks.

"To live in a country with 260 million people that is dominated by only 10 media companies should be alarming," said Robert McChesney, a professor at the Institute of Communications Research at the University of Illinois. "This kind of concentration of wealth undermines freedom of expression."

The sheer size and complexity of the two companies may represent a huge analytical challenge for the Federal Communications Commission, which regulates cable and telecommunications companies, and the Department of Justice and the Federal Trade Commission, which oversee corporate mergers with antitrust implications. The proposed merger follows a period of unprecedented consolidation among entertainment and telecommunications companies.

The merger, which was a closely held secret until unveiled Monday morning, was hailed by Wall Street and industry leaders as a bellwether of the convergence of entertainment content and the Internet.

"Simply stated, content was recrowned as king of the media age," said Sumner Redstone, chairman and chief executive of Viacom Inc.

Cable executives similarly took credit for the huge premium Time Warner got in the deal, saying that the price tag reaffirmed their networks as the preferred pathway into the home for Internet, phone and television services.

In trading Monday on the New York Stock Exchange, AOL fell $1.13 to $72.63, including a slight rebound in after-hours trading that increased the value of the deal to $170 billion from the close of regular trading. Time Warner, whose shareholders will receive a nominal 71% premium for their shares over Friday's price, soared $27.50 to $92.25, including after-hours trading activity. Other entertainment and cable stocks also rose sharply.

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