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Janus upbeat on AOL deal
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January 31, 2000: 7:14 p.m. ET
Fund group thinks America Online will benefit from broadband access
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NEW YORK (CNNfn) - Janus Investments, already the largest shareholder of America Online and Time Warner, has been adding to its position since the companies announced a blockbuster merger last month.
Scott Schoelzel, manager of the Janus Twenty Fund, and John Schreiber, assistant manager of Janus Fund, explained their optimism about the deal in the following question-and-answer session with cnnfn.com.
(Time Warner is the parent of cnnfn.com).
1. What is your overall opinion of the merger? Are you enthusiastic or cautious? We are extremely excited about the merger. The deal simultaneously eliminates the only missing piece of each company's stand-alone strategy and provides the new company with an unstoppable mix of content and distribution going forward.
By giving AOL broadband access, and by giving Time Warner a leadership position on the Internet, the deal is defensively sound.
When we examine the potential revenue and cost synergies of the combined company, the possibilities are truly mind-bending.
Every one of Time Warner's traditional media vertical market positions can be improved by the relationship with AOL. Imagine streaming video and audio of Warner Bros. films and Warner Music artists. Imagine interactive overlays of AOL's ICQ and AIM instant messaging on Turner cable networks. Imagine the bundled subscription and advertising sales potential.
For AOL, the cross-promotional power available from the WB Network, Time Inc. Magazines, Warner Bros. Studio Stores, and the Turner nets will be tremendous. RoadRunner, Entertaindom.com, cnnfn.com, and many other Time Warner online properties can see accelerated development with AOL's eyeball reach and management expertise. So all the ingredients for a powerful growth recipe are here. I would call this a "high octane" offense.
Not many deals of this size and scope truly make sense. But with AOL Time Warner we see a package of complementary assets, strong management, and leadership-competitive positions that is together so strong that competitors will have an extremely difficult time catching up. The world of new media has just begun, but this combination is already suggesting that the game is over.
2. Are you selling or adding to your position? We have taken advantage of the market's initial uncertainties about the merger to add to our combined position as a firm. We believe the initial days of choppy trading in the stocks represented investors getting a handle on how to value the combined entity. Because Janus was so intimately familiar with the two stand-alone companies, we were able to quickly perform relevant analysis and determine that AOL Time Warner represents explosive growth at an extremely reasonable price. This enabled us to add significantly to our position at very attractive prices.
3. Some analysts have said America Online's growth will suffer as a result of its merger with a traditional media company. What do you think? Analysts who complain about a deceleration of AOL's growth as a result of the merger are very shortsighted. We believe that the combined company will enjoy a bigger, faster growth trajectory for a longer period of time than what AOL would have enjoyed separately. The facts of the matter are that the broadband opportunity and cross-promotional opportunities will provide AOL with lower subscriber acquisition costs, lower churn rates, and higher margins than what AOL could have achieved on its own. These factors will help AOL Time Warner dramatically improve its returns on capital going forward.
That is a good formula for multiple expansion. And the current multiple on AOL Time Warner deserves to expand. The stock trades at about 47 times free cash flow, and that free cash flow is going to grow at a 40 percent rate. That is a multiple to growth rate of about 1.2. Compare that to the other S&P megacap growth companies, GE, Microsoft, and Cisco, all of which trade at two to three times growth. Explosive growth at a very reasonable price. This is the type of opportunity that has us licking our chops at Janus.
4. Are you concerned that AOL's stock price drifted lower after the deal was announced? Why do you think it was happening? Actually, after the initial couple days of choppy trading, AOL's stock price has stabilized while Time Warner on Friday closed above its initial $90 closing price on the day the deal was announced. The initial arbitrage spread between the two stock prices has closed to the point where it is no longer interesting to professional arbs. These two factors tell us that the market is beginning to understand the deal's power, and that AOL shareholders who may have initially been inclined to sell may be reconsidering.
5. How do you think this deal will influence the development of the high-speed Internet access market? Without question, the combination of the world's leading internet company and the world's leading media company (which just happens to be our country's second largest cable operator) will accelerate the proliferation of broadband access. This is one of the key elements of the deal. It is likely that AOL Time Warner will obtain distribution from other cable operators, and that the strength of the AOL online brand will pull through broadband demand, making everybody a winner: AOL Time Warner, the cable operators who choose to partner up, and, most importantly, the consumer.
6. What do you think will be the next combinations between Internet companies and media companies? While we would refrain from speculating about potential deals to come, it is clear that in an era of vast media distribution capacity, there remains a shortage of high-quality, premium-branded content. Too much demand, too little supply means content is king. We have attempted to benefit Janus shareholders by taking large positions in Viacom/CBS and Liberty Media, two of the highest quality sources of content available on the planet.
7. What are the biggest benefits of the deal? Likewise, what are the disadvantages? The biggest single benefit from the deal is an overlay of two very powerful standalone sets of positive network effects. By combining AOL's 23 million-plus online membership base with Time Warner's strong competitive positions in magazines, cable networks, film and TV production, subscription television, and music, shareholders in the new company will benefit from increasing returns to scale. Quite simply, AOL Time Warner can procure subsequent pieces of content and distribution at much lower incremental cost than its competition. This means the competitive gap here is going to widen. That's why we believe the new media game may already be over - AOL Time Warner's competitors just don't know it yet.
The biggest disadvantage of the deal is that it creates an opportunity set so rich and large that it may be a bit difficult for management to prioritize where the biggest bang for the buck lies. Because we are so highly confident in Gerry Levin, Steve Case and their teams, we believe AOL Time Warner will overcome this initial challenge and provide dramatic returns to shareholders going forward. We hope your readers enjoy the ride as much as Janus and its shareholders!
It might not be a surprise that Asia stock funds are doing well in 2000, but two new winners have leaped to the top of the performance charts: long-term government bond funds and long-term bond funds.
Long government bond funds were the fourth-highest performing category for the week ending Jan. 28, earning 1.91 percent, according to fund-tracker Morningstar. Long-term bond funds gained an average of 0.91 percent.
Japan stock funds earned an averaged of 4.57 percent for the week, while diversified Pacific Asia funds took in 3.46 percent, Morningstar said.
Among other parts of the market, nine Internet funds tracked by Morningstar were in the red for the week. The losses range from 5.23 percent for Monument Internet Fund to 8.46 percent for Guinness Flight Internet Index Fund. 
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