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EU OKs AOL-Time Warner
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October 11, 2000: 8:50 p.m. ET
Europe clears merger after AOL agrees to cut ties with Germany's Bertelsmann
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BRUSSELS (CNNfn) - European regulators conditionally approved the $125 billion merger of America Online Inc. and Time Warner Inc. Wednesday, diverting investors' attention back to two U.S. regulatory agencies that still hold the power to derail the blockbuster union.
The European Commission, the executive arm of the European Union, gave the green light on the condition that AOL (AOL: Research, Estimates) sever all of its "structural links" with the German media firm Bertelsmann AG, one of Time Warner's (TWX: Research, Estimates) top competitors.
The proposed merger partners -- whose union would create the world's largest media company, with interests in entertainment, cable and online services -- agreed to a package of concessions designed to break AOL's links with Bertelsmann, the commission said. The EU was seeking to ensure the merged media and Internet company could not control access to Europe's leading source of music publishing rights.
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CNNfn's Charles Hodson reports on the EU approval of AOL-Time Warner merger.
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With the EU hurdle cleared, investors attention returned to the United States, where both the U.S. Federal Trade Commission and the U.S. Federal Communications Commission are expected to make their rulings on the merger, the FTC perhaps as early as next week.
The FCC said Wednesday that it is stopping the clock on its review until after the FTC acts. In a letter announcing the move, the FCC said "it's the FCC's normal practice to wait for action by the antitrust agency (DOJ or FTC) before taking its own action." Once the FTC acts, the FCC will issue its own timetable on the merger.
In a joint statement Wednesday, AOL and Time Warner said their discussions with U.S. regulators were "proceeding well" and they remained confident the negotiations would "conclude successfully."
Still, investors seemed decidedly more insecure. Both AOL and Time Warner shares had shed more than 6 percent of their value at one point during the day Wednesday despite the positive news out of Europe. AOL traded down $2.74, or 4.8 percent, to $54.50 while Time Warner lost $3.71, or 4.4 percent, to $81.39.
AT&T Corp. (T: Research, Estimates) threw a new concern into the deal's future Tuesday when it made public a letter sent to the FCC saying the telecommunications titan could not dispose its 25.5 percent stake in Time Warner's entertainment subsidiary without a change in its partnership agreement with Time Warner, the parent company of CNNfn. Some regulators and legislators are concerned that interest might effectively stymie competition.
Yahoo! pulls down stocks
But at least one industry analyst attributed the decline of both stocks to concerns about long-term revenue slowing at Yahoo! Inc. (YHOO: Research, Estimates) because of an expected slowdown in Internet advertising.
Yahoo! posted solid third quarter earnings Tuesday, but a recent analysis by Lehman Brothers and Booz Allen & Hamilton found that 75 percent of all online advertising revenue went to just nine sites, most notably America Online and Yahoo! The Internet portal said Tuesday that a shrinking portion of its advertising revenue was attributable to Internet companies that are "financially questionable," but the company's cautious tones worried some analysts.
"The answer is Yahoo!," said Scott Davis, a media analyst with First Union Securities, when asked about the stock activity. "In the back of everyone's minds is advertising for dot.coms slowing. In my mind, that [impact] certainly will be temporary as it relates to AOL."
U.S. regulators are investigating whether the combined AOL Time Warner would have the power to control vast swaths of access to the Internet and stifle competition.
In what could be a pointer to thinking in Washington, EU spokeswoman Amelia Torres said the European Commission saw "no need" to impose conditions on the merged company's business in the arena of instant messaging services. AOL Time Warner's dominance of that market reportedly has been an issue of concern to U.S. officials.
Representatives of several rival instant messaging companies are set to meet Thursday with FCC Chairman William Kennard to discuss the proposed merger's impact on their businesses, CNNfn has learned.
"We always work closely with U.S. regulators," Torres told CNNfn.com, declining to comment further on the likelihood of the deal getting U.S. approval.
Disbanding a possible "gatekeeper" of music
Bertelsmann and Time Warner, which owns Warner Music, together account for about one-third of Europe's market for recorded music, and are two of the world's five largest music publishers, the European Commission said. Bertelsmann's BMG music division publishes the work of artists such as Whitney Houston and David Bowie.
If AOL's ties with Bertelsmann were not broken, AOL Time Warner, as the company would be known, "would have become the gatekeeper of this nascent market, dictating the conditions for the distribution of audio files over the Internet," the commission said in a statement.
AOL operates Internet access services in Europe through two joint ventures with privately held Bertelsmann. As well as AOL Europe, which the companies own 50:50, they have a three-way tie-up called AOL Compuserve France that also includes France's Vivendi SA (PEX). Shares in Vivendi fell  1.05 to 86 in Paris Wednesday.
In an interview with CNNfn Wednesday, Commission boss Mario Monti warned the AOL/Time deal had come close to being blocked: "It would have been possible technically as well as politically to block AOL-Time Warner, if we had not been satisfied about the remedies proposed," Monti said. The Commission had until Oct. 24 to rule on the deal. 
Warner-EMI venture called off
Time Warner last week shelved plans to form a $20 billion music joint venture with Britain's EMI Group PLC, another of the world's top five music publishers. The companies withdrew their request for merger permission because they expected regulators to block the tie-up.
"In a music market already characterized by a high degree of consolidation, the danger which has been averted was that by allowing AOL to team up effectively with three of the five music majors, the resulting integrated company could have dominated the online music distribution market and music players," Monti said in a statement.
Bertelsmann has agreed to quit the AOL Europe venture and AOL Compuserve France, the commission said.
AOL Time Warner will also refrain from taking any action that would result in Bertelsmann music being available online exclusively through AOL or formatted in a way that could only be listened to by users of AOL music players.
Rivals to AOL and Time Warner also raised concerns about the merger's impact on the European market for high-speed Internet access. The commission concluded that those fears were unfounded because AOL Time Warner would have no high-speed Internet infrastructure in Europe. 
-- with additional reporting by CNNfn.com's London and New York bureaus
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