Microsoft roils AOL deal
Software maker reportedly asking FTC for stricter conditions on merger
NEW YORK (CNNfn) - Microsoft Corp. is talking to the Federal Trade Commission about the proposed AOL-Time Warner merger, a spokesman for the company confirmed Tuesday.
According to a published report, Microsoft is attempting to persuade U.S. regulators to impose stricter conditions on what would be the biggest merger ever in the Internet sector.
The software firm has raised questions behind the scenes over the impact of the proposed America Online Inc. (AOL: Research, Estimates) takeover of Time Warner Inc., the Wall Street Journal reported Tuesday. Time Warner (TWX: Research, Estimates) is the parent of CNN and CNNfn.
Microsoft spokesman Vivek Varma told CNNfn "Microsoft has been engaged in a dialogue with the Federal Trade Commission" about the pending deal, but noted that other companies, including Walt Disney Co. (DIS: Research, Estimates), have also talked to regulators.
A Time Warner spokesman would not confirm whether such objections had been raised with the FTC.
The commission did not immediately return calls requesting comment.
Microsoft is no stranger to regulatory intervention and is currently appealing a judge's decision to split the company because of antitrust concerns. AOL, a longtime Microsoft rival, helped regulators during the Microsoft antitrust case.
The Journal said Microsoft's involvement as a "spoiler" could complicate approval of the $113 billion deal by the Federal Trade Commission, a process that already has been subjected to delays.
AOL Chairman Steve Case, speaking at the UBS Warburg Media Conference in New York, remains confident the merger will be completed quickly.
"We are in the home stretch," Case said. "We do think we will have this merger approved soon. We're on track to close this month, maybe the first few days of next year."
Open access at the center
The key issue is whether a combined AOL-Time Warner would dominate the availability of high-speed Internet access. To appease concerns on this matter, Time Warner agreed in November to allow Internet service provider EarthLink (ELNK: Research, Estimates) to provide its high-speed Web services over Time Warner cable systems.
At the same time, it was reported the companies were negotiating for a similar deal with Microsoft, but according to the Journal that deal fell apart as Time Warner chose weaker rival EarthLink.
John Corcoran, an analyst who follows AOL for CIBC World Markets, said AOL and Time Warner initially tried to "cherry pick" much weaker firms to make an open access deal with, but the FTC turned them "almost kicking and screaming" to firms with a better chance of long-term survival.
Speaking at the UBS Warburg conference, Case reiterated AOL and Time Warner's commitment to open access.
Media analyst David Londoner of ABN Amro told CNNfn that concession should clear the way for the merger.
"From what I read and from what I hear they have probably solved the problem if they let EarthLink go onto their cable systems prior to marketing AOL," Londoner said. "My understanding is the way the contract was written all they had to do was sign the contract, but they didn't have to put EarthLink on first. My guess is the FTC will require them to have EarthLink actually operating before AOL can go in there."
Microsoft (MSFT: Research, Estimates) is arguing that to ensure competition, Time Warner must allow a deal based on a flat fee for wholesale Internet access that would decline over time, the Journal said, citing sources close to the talks.
"I think this is continued jockeying [by Microsoft] in an effort to squeeze out last-minute concessions," said Rob Martin, analyst with Friedman, Billings, Ramsey & Co.
Martin said Microsoft's influence could cause a small delay and may add to any roster of changes the FTC asks for regarding the EarthLink deal, but will not significantly affect the deal.
The FTC is set to vote on the merger next week, the Journal said. While the EarthLink agreement was seen as a step that could pave the way for approval, the commission has misgivings because a deal was not completed with Microsoft.
"I believe the odds are very, very high that they get it," Londoner said. "The FTC should rule by the end of next week. Then you've got the FCC, and once that's done, this deal should close."
Corcoran said time is running out for companies to try and get more concessions.
"This is a good time for everyone to come out of the woodwork," he said.
In Tuesday afternoon trading, shares of Microsoft jumped $3.19 to $59.62. AOL rose $3.20 to $44.25 and Time Warner rose $4.31 to $65.91.
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