AOL merger expected to spur others

Key is whether No. 1 media company meets its goals

`Story is not over'

Its many outlets will create voracious appetite for content

January 13, 2001|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

With the government's approval of the America Online Inc. and Time Warner Inc. merger, analysts predicted yesterday that the industry will undergo more consolidations as competitors try to keep pace.

Media companies are also expected to begin to speed up their Internet development and strategies.

"We are anticipating that the consolidation story and the merger story is not over," said Rudy Baca, an analyst with the Precursor Group Inc., an independent research company in Washington that focuses on communications, media and information technology.

"You will see a lot of mergers, partnerships, attempts to bulk up to compete with this kind of company," said David Smith, an analyst with Gartner Group Inc., the Connecticut information-technology consulting business.

AOL's purchase of Time Warner Inc. for $124 billion in stock and assumed debt is the biggest acquisition in U.S. history and the second largest worldwide.

The new company unites AOL's nearly 29 million Internet subscribers with Time Warner's 12.6 million cable-TV subscribers, CNN and other media holdings such as Time, Sports Illustrated and People magazines.

The Federal Communications Commission's approval Thursday was the final regulatory hurdle. "It was a hurdle that they cleared easily," said Scott Davis, a media analyst at First Union Securities in New York.

On its first day of trading on the New York Stock Exchange, AOL Time Warner's shares (ticker symbol AOL), fell 76 cents to close at $46.47.

But Gerald M. Levin, the company's chief executive, said yesterday that AOL Time Warner would meet revenue and cash-flow goals for this year that were set by the two companies a year ago.

When the companies announced their merger in January last year, they said they would generate $40 billion in sales this year and about $11 billion in earnings. That includes about $1 billion in cost savings and additional revenue from new initiatives.

How well the two companies operate as one will set the tone of the media industry.

"To the extent that AOL Time Warner is able to demonstrate some real synergies ... I think other companies that are in the media business will merge," said Robert Hertzberg, an analyst that covers media for Jupiter Research.

If the compatibility is quickly visible, media industry consolidation will happen faster. If it comes more slowly - or not at all - other media firms will feel less pressure.

The merger could also make room for smaller companies to emerge to feed the AOL Time Warner machine's voracious appetite for content, said Daniel O'Brien, a senior analyst at Forrester Research.

Ken Kiarash, an Internet analyst with Buckingham Research Group in New York, expects other media giants, such as Walt Disney Co. and Viacom Inc., to join Internet companies or increase spending on their Internet plans - though he doesn't expect them to be on the hunt for large acquisitions.

"I think going forward there will be a lot of partnerships and a lot of spending for internal development of Internet strategies," he said.

Baca predicts that old media companies with vast content libraries will merge with the most modern delivery systems, principally through the Internet, to keep a competitive edge.

"The business pressures are just too great to be able to remain competitive with a player that is that dominant and that large in their own spheres," he said.

As the competitive climate heats up, the effects will be felt in consumer's living rooms. "I think it's going to be fascinating to watch, and the proof of the pudding is new product development," Hertzberg said.

For consumers, the formation of AOL Time Warner will mean new and faster services. Services promised years ago, such as interactive television, could make its way into homes a lot quicker than anticipated.

Competitors will have to match those kinds of services, and consumers will be able to get more for their money.

"From the consumer point of view, they should expect to see a tremendous amount of products and services coming to them in the next 12 to 18 months," Kiarash said.

BridgeNews and Bloomberg contributed to this article.

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