AOL/Time Warner Down to Wire

Yesterday the Federal Trade Commission deferred a decision on the AOL/Time Warner merger, citing continued difficulties with the merger's effect on open access for Time Warner's cable systems. Meanwhile, a coterie of heavy-hitters has aligned itself against the merger, either to block it entirely or to make sure that approval comes at a very high price. As "vertically integrated media" companies such as Sony have shown in the past with their dismal failures, the combination of media and delivery is not necessarily a sure thing. But, there aren't many other companies that could pull it off like an AOL/Time Warner combo.

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By Bill Mann (TMF Otter)
November 10, 2000

Before I begin, I'd like to make a plea to the scions of the corporate world. Enough with the mashing names together for merged companies. Can you not come up with something a bit catchier than "AOL Time Warner"? Fine, I know that we just don't want to have to let any of the goodwill built up in our brands just slip out the front door, but I don't think dilution is the answer either.

The name Time Warner (NYSE: TWX) was an abomination itself, combining Warner Brothers and Time-Life. America Online (NYSE: AOL) at least has the good sense to strengthen its brand by dropping its regional or national connotations.

In fact, let's take an informal and entirely curmudgeonly poll. For everyone reading this in Florida, please note that there is only one spot next to each option. Do not try to poke a hole in your computer screen.

OK, so which is the worst name combination to come down the pike in the past few years?

  1. ExxonMobil (NYSE: XOM)
  2. Excite@Home (Nasdaq: ATHM)
  3. AOL Time Warner
  4. RJR Nabisco
  5. You missed the worst one... (fill in the blank)
The two FOOL 50 Index companies are at fingernail biting time, as the commissioners of the Federal Trade Commission (FTC) met yesterday and voted to delay a decision on clearing the proposed merger. As the ultimate decision has come closer and closer, the noise level from those with a vested interest in blocking the merger, or at least gaining some valuable concessions, has risen to a fever pitch.

There are several possible outcomes from the FTC vote. The commissioners could approve the deal, they could reject it, or they could send the compromise between FTC staff and the two companies back for further negotiations.

AOL and Time Warner are both highly complex companies, with vestiges of service provider and common carrier. Already Time Warner has had to sacrifice its proposed merger with EMI to gain acceptance of the AOL deal by European regulators.

In the United States there are many issues, the largest is the position of Time Warner as the second-largest cable network in the United States, after AT&T (NYSE: T). Rival companies to AOL, including Yahoo! (Nasdaq: YHOO), Excite@Home (Nasdaq: ATHM), and CMGI (Nasdaq: CMGI) have bound together to oppose the deal, primarily on the basis that Time Warner is in a position to shut out other Internet service providers on its cable networks. Disney (NYSE: DIS), iCast, and others have further complained about AOL's monopolistic practices in the instant message market.

The issue is whether the cost is too heavy for both companies to make the deal work. Many analysts believe that the combination of AOL and Time Warner will create such a powerful agglomeration of media that, for all their bellyaching, they will in fact accept any such conditions.

On Wednesday, the FTC demanded that Time Warner not only promise to open its system to other Internet service providers (ISPs), but also that it have at least one access deal with an ISP inked. Then the FTC wants to examine the contract. There may yet be some demand by the FTC for AOL to open up its instant messaging service to external users. AOL has pledged to do so, but has demurred when asked for a firm schedule.

Whew. I'm not sure about you, but I'm just not sure that the whole merger is worth it. Sure, we'd have a media powerhouse with delivery as well as content. But, we had that in the last decade, in the form of a disaster called Sony (NYSE: SNE). Sony, if you recall, bought Columbia Pictures in 1989 and, at the time, was pushing toward complete vertical integration, where it could cross-sell Sony music and media products, and show it at Sony movie theaters. Several others have followed.

Sony's plan was a complete disaster from a financial perspective and, in the mid-'90s, the company backed away from its plan and sold off several components of its erstwhile media empire.

There might be a lesson here for AOL and Time Warner. In the end, rather than enhancing the brands and products of one another, they might end up restricting each other, as AOL puts a constraint on the distribution channels of Time Warner's media properties and vice versa. If the two companies cannot successfully build on one another, they do not get a "do-over" from regulators in terms of the price they will pay in loss of control over their respective networks and lack of AOL availability on Time Warner cable systems.

In spite of the additional concessions that might be in the offing, AOL and Time Warner are hungry to get this deal in the bag. Meanwhile their competitors are seeking to make the two suitors pay dearly for the right to combine their $11 billion in cash flow into a single entity.

If the FTC comes back and forces concessions that are too costly up front, I hope for AOL and Time Warner shareholders that Steve Case and Gerry Levin have the sense to walk away. But, as Jeff Fischer points out in his Motley Fool Quarterly Research Report, "AOL Time Warner believes that it will lead the convergence of the Internet, TV, video, music, and other content. We agree. It will lead. (If not Time Warner, then who?)." It is the parenthetical part that is the true rub for this merger. It is also the reason why such players as Disney and Yahoo! are staking so much on ensuring that it fails.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards