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Other media deals on tap?
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January 10, 2000: 7:09 p.m. ET
Analysts say AOL, Time Warner deal puts pressure on Internet, media rivals
By Staff Writer Jamey Keaten
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NEW YORK (CNNfn) - It’s a whole new ball game in media, and investors can expect further changes in corporate lineups following the record $182 billion deal between America Online Inc. and Time Warner Inc. announced Monday, analysts say.
The queen of old media, Time Warner, with her empire of television, music, cable and movies, is betrothed to the king - or at least the most powerful duke - of cyberspace, America Online, as part of the record $182 billion deal on Monday.
The big, older media companies have toed the waters of the Internet tentatively, dipping in with relatively modest investments in cyberspace. But now, the shoe is on the younger foot: Internet firms are so valuable now that they are the one’s who can be the buyers - not the other way around.
AOL’s purchase of Time Warner suddenly gives Internet firms, despite their nosebleed valuations, added legitimacy as potential buyers of old-school media conglomerates.
Gerald Levin, Time Warner’s chairman and chief executive officer, may be the first executive in the traditional media sector to admit the legitimacy of those high prices for cyber-stocks.
"The market capitalization in the Internet space, I accept,” said Levin at a news conference Monday. "In my own mind, I’ve been saying for the last year, that it’s probably likely in the year 2000 that we are going to see somebody transact, and figure out how to bring these companies together.”
The buyout of Time Warner, the nation’s biggest entertainment giant and the second-largest cable company after AT&T, amounts to the first time an Internet company has stretched out of cyberspace to gobble up a bricks and mortar media company.
"I decided I wanted us to be first,” Levin added. "I had concluded either we would do something with AOL or we would build ourselves but this is infinitely preferable.”
‘Back to the drawing board’
Cable companies, entertainment giants, and Internet players may now need to reevaluate how much emphasis they’re putting on the Internet, and decide whether they too are ready for a mega-deal.
"It certainly will cause a lot of these companies to go back to the drawing board and figure out what their strategy is, going forward,” said J. Michael Gallipo, a fund manager at Monument Funds.
"It might even intensify pressure on some of the mainstream media companies, like a Disney (DIS), like a Viacom (VIA), that have maybe not executed their Internet strategy as well as some of the other companies,” added Gallipo.
Another looming wild card is long-distance powerhouse AT&T (T), which intermittently has been the subject of AOL merger rumors itself, and now finds itself facing a new rival in cyberspace that has a content package and, thanks to Time Warner’s cable lines, the means to distribute it.
AT&T’s WorldNet service is among the top three Internet service providers after AOL’s, Microsoft’s (MSFT) MSN network is also a leading competitor.
Meanwhile, a question mark also looms over those stock-enriched Internet companies, which may also soon be beating the drum on the buyout warpath in the wake of AOL’s move.
"And one of the reasons that you see all of the other stocks lifting today is people are speculating, ‘what does Yahoo! (YHOO) do, what does Lycos (LCOS) do,’ et cetera,” said David Londoner, a media analyst with Schroders & Co.
But one analyst, noting the nearly complete entertainment, news and cable package that Time Warner brings to AOL, said other deals may not be as easy to strike.
"Today’s announcement really does change the tectonic plates in this world,” said Chris Dixon, a media analyst with PaineWebber. "Other deals will be a bit more difficult to put together.”
The standout effort, up to now, to mesh a top Internet player with an entertainment giant was USA Networks’ failed bid to win web portal Lycos. That merger fell apart due to investor confusion and the defection of a top Lycos shareholder.
Investors also appeared to believe the AOL-Time Warner deal may spark more consolidation in the media business. According to a CNNfn.com poll on Monday, more than 90 percent of respondents said they expect more media mergers.
Wall Street also seems to expect more deals. Disney shares rose 4-3/4 to 35-7/8, AT&T rose 1-5/8 to 50-7/8, Viacom jumped 5-5/8 to 59-1/2, while Rupert Murdoch’s News Corp. (NWS) rallied 7-5/16 to 45-1/16.
On the Internet side, Yahoo! rose 28-13/16 to 436-1/16, Lycos climbed 9 to 79-3/4 and ExciteAtHome (ATHM) climbed 1-3/16 to 40-1/8.
No strangers to deal-making
The rationale for buying Net stocks, fuelling sky-high valuations, is that growth prospects over time are so compelling that companies are willing to face losses as they build for the long haul.
But that’s been a staple of any startup business: when it was founded in the early 1920s, Time Inc., one of Time Warner’s forebears, told shareholders it would use any profits to build the business, not pay a dividend.
AOL, founded in 1985 and built on a subscription-paying member base, has been profitable nearly since its inception - in something of an anomaly for an Internet company.
The deal, four months in the making and couched under a tight veil of secrecy, pairs two media titans that are no stranger to mergers and in fact have been vigorous colonists in media domains new and old.
Levin said Time Warner, born out of the $7 billion merger between Warner Communications Inc. and Time Inc. in 1989, is younger than AOL, which was formed in 1985. Then in 1995, Time Warner gobbled up Turner Broadcasting for $7.5 billion.
Time Warner, like its rivals, has been picking its investments in cyberspace such as buying pieces of online music vendor CDNow, the online business information site Hoover’s and WebMD. That is on top of its ownership of branded sites affiliated with its magazines and television channels.
AOL, for its part, last year purchased browser maker Netscape Communications for $4.2 billion and online map provider MapQuest for $1.1 billion. It also has an array of partnership arrangements, with companies such as retailing giant Wal-Mart. 
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