More deals may be logging on

AOL move has others in media scrambling

January 11, 2000|By Sean Somerville | Sean Somerville,SUN STAFF

America Online Inc.'s $179.1 billion acquisition of Time Warner Inc., which would join companies born 62 years apart, would force old and new media players to think about joining forces to compete, industry experts said yesterday.

"This deal combines the most developed Internet company and the most developed media company," said Paul Noglows, an analyst for San Francisco-based Hambrecht & Quist. "This really raises the bar when you see this kind of integration."

Companies pondering combinations might include Internet companies Yahoo!, Earthlink and Mindspring, and a short list of media companies including News Corp., Walt Disney Co. and Viacom, whose merger with CBS Corp. won't be official until April, analysts said yesterday.

"Five years from now, AOL Time Warner is going to be a significant media company," Noglows said. "Does Yahoo! need to partner in order to cement that kind of future?"

For their part, so-called old media companies might soon be asking: "If this is the definition of a media company, how do we fit in?" Noglows said.

The pending combination, which would give AOL access to Time Warner's large cable network system -- the second largest behind AT&T's -- and to a vast array of media properties, sent investors flocking to cable and media companies. The stock prices of Disney, News Corp., Seagram, Viacom and CBS all rose at least $4.375. Internet companies, including Yahoo! and Lycos, and cable companies also saw their stocks move higher.

"Companies have spent the last few years bulking up within their segments," said Jeff Kagan, an Atlanta-based telecommunications analyst. "What we're going to see now is that the consolidation will spread across industries."

Although analysts had been expecting a combination of Internet and media companies, the deal joining Henry Luce's Time Inc., founded in New York in 1923, and America Online, founded in 1985 in the Northern Virginia suburbs, was not leaked to the news media before the announcement and appeared to catch Wall Street by surprise.

However, some analysts had suspected that something was in the offing. "Everybody's been waiting for the shoe to drop," said Trace Urdan, an analyst at Deutsche Banc Alex. Brown. "And it finally has."

Suddenly, there is speculation about partnerships. Internet companies need compelling content to capture "hits" that attract advertising revenue and media companies have struggled to build a profitable presence on the World Wide Web. Yahoo Disney and Yahoo Viacom were just a couple of possibilities floating around yesterday.

"My instincts are that this creates a lot of panic," said Tom Burnett, an analyst with New York-based Merger Insight. "A lot of guys are caught short, and they're going to have to start worrying about alliances. I don't think people are going to be left behind without partners. It's just that there may be fewer players left to dance with."

Analysts said cable companies, such as Cox and Comcast, which have the fast, broadband access into millions of homes coveted by both Internet companies and media giants, stand to profit as competition heats up.

"Cable companies are going to be highly sought after," said Drake Johnstone, an analyst with Davenport & Co.

The idea that the Time Warner-AOL deal will be copied does have some doubters. For one thing, there are few media companies like Time Warner, which owns not only Sports Illustrated, Time, HBO, People, and movie, television and music studios, but also 13 million cable subscribers. "This deal certainly isn't replicatable," Noglows said.

Internet service provider Earthlink Network Inc., which is acquiring rival MindSpring Enterprises Inc., isn't sure that obtaining content is the way to go. "We don't think being in the content business is necessarily central to being in the access arena," Earthlink Chief Executive Officer Charles Betty said yesterday. "We think we can compete very effectively."

Still, for some analysts, the deal signals the beginning of new respect for media companies, which have seen the stock of Internet competitors soar with little justification, while their shares were subject to old rules of financial analysis.

"What's remarkable," said Urdan, the Deutsche Bank Alex. Brown analyst, "is that Time Warner is getting an Internet [price-to-earnings] multiple."

Urdan said stocks in almost all print publishing companies increased. "Content companies are getting a boost," he said.

Urdan also said the deal might help companies that have nationally established properties, such as the New York Times Co. and Dow Jones & Co., which owns the Wall Street Journal. "This puts an increased amount of pressure on newspaper companies that have only a local presence," he said.

Kagan, the telecommunications analyst, sees a total convergence of almost every type of company in the information business. It would combine phone service, entertainment, information and news. "We're going to see network and content providers start to blend, and we're going to see old companies and new companies get together.

"When the dust settles, they will be just one big industry," he said.

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