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Valuing AOL Time Warner
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December 15, 2000: 2:13 p.m. ET
Investors must wrestle with trying to value shares in a new kind of company
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NEW YORK (CNNfn) - When AOL completes its acquisition of Time Warner it will create a kind of company as yet unseen on Wall Street, and investors will have to grapple with how to value a combined media and technology behemoth.
On Thursday, the Federal Trade Commission approved the $111 billion merger, which the companies expect to complete at the end of this year or early 2001.
ABN Amro said in its weekly commentary that the deal "creates a cash flow powerhouse with unparalleled content, distribution, and direct merchandising opportunities."
"We cannot think of another combination of two or more entities that approaches the strength and positioning of this combination," the report said.
What's this thing worth?
According to analysts, those valuing the combined company should treat it as both a media powerhouse and a high growth company, but the fundamentals will remain the same.
"AOL Time Warner will be valued like a traditional media company with superior growth prospects," said Fred Moran, analyst with Jefferies and Co.
 Moran said even discounting all possible new business initiatives, the company is capable of growing at about 25 percent, but with the ventures it could see first-year growth of 30 percent.
"When they start to cross-promote and cross-sell their products those Time Warner assets should see an enhancement to their growth rate," he told CNNfn. "Plus we are on the verge of a breakout in growth of high-speed cable modems, which will drive those cable bills. That's half of Time Warner's cash flow. So Time Warner looks very cheaply valued here"
"I think the old rules still apply," said ABN Amro analyst Arthur Newman. "The company's value is related to its cash flow."
Newman said based on that, the company looks very attractive. He added investors should keep a look out for EBIDTA (earnings before interest, depreciation, taxes and amortization) growth as well, as media companies have been traditionally valued on that basis.
According to First Union Securities analyst Scott Davis, how to value the company is not as much of a mystery as it was when the deal was first announced and compared with companies like Disney (DIS: Research, Estimates) and Viacom (VIA: Research, Estimates), AOL Time Warner stock looks cheap.
 "The company should be compared to other media companies and large-cap growth companies, which usually come from the tech sector," Newman said.
Other comparable companies mentioned by analysts were News Corp. (NWS: Research, Estimates), Vivendi Universal (V: Research, Estimates), Yahoo! (YHOO: Research, Estimates), and possibly even Microsoft (MSFT: Research, Estimates) and Cisco (CSCO: Research, Estimates).
Merrill Lynch Internet analyst Henry Blodget said the stock would be a very good investment, but over time.
"I think it's important to understand that this is not a go-go stock," Blodget said. "It's not the Internet stocks of a year ago or two years ago. But as a good, long-term investment, we really like the stock. We think the company's very well-positioned, valuation is reasonable, which is very hard to say for a lot of Internet companies over the last few years."
In a research note issued Thursday, SG Cowen reiterated its "strong buy" rating on the stock, with a price target of $100 to $110 based on Time Warner's (TWX: Research, Estimates) current share price.
Although it is hard to predict what AOL and Time Warner may have up their sleeves when the merger is completed, but Moran said consumers will have interactive television and high-quality streaming video much faster than they would have without the merger.
In afternoon trading on the New York Stock Exchange, shares of AOL (AOL: Research, Estimates) fell $2.90 to $47.10, while Time Warner fell $3.50 to $71. 
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