ST. ROMAN DE MALEGARDE, FRANCE (Jan. 12, 2000) -- Here it is, a couple of days after the gargantuan Time Warner (NYSE: TWX) and America Online (NYSE: AOL) merger, and, as Jeff wrote last night, it will take some time to digest. Before the announcement, the biggest merger on record was last October's MCI WorldCom-Sprint agreement for $129 billion. Ah, $129 billion... $200 billion... $300 billion... after a point the numbers begin to lose meaning, don't they? We can just say it was Very Big.

The AOL-Time Warner deal is being described throughout the media alternately as a merger and as an acquisition. How is it that AOL gets to buy Time Warner, and not the other way round? After all, AOL has around 12,000 employees, while Time Warner has over 67,000. AOL had 1998 sales of $3.09 billion; Time Warner more than quadrupled that number, at $14.58 billion. And while AOL lost $90 million in 1998, Time Warner made a profit of $586 million. So who's buying whom?

The one key number left out of the above list is market capitalization, which is the value, based on the number of shares and the price per share, that the market grants to each company. AOL's market cap (at the time of the merger; down somewhat now) was around $164 billion Monday, while Time Warner's was $97 billion. AOL had more loot to pony up, and could offer to buy Time Warner's stock at a premium.

The Present

I learned the news from CNN international here in France, beamed to me from a satellite that hovers 19 degrees up from the southern horizon, and at which a small dish about the size of a large truffle omelet (subscribe to our cable services and the dish is FREE, though we promise you no omelets) is pointed, strapped to my chimney. The correspondent/expert at CNN (A Time-Warner company, of course) was being asked about "the implications" of this merger.

She said that, well, for one thing, we're going to see a lot more content on AOL -- trailers, streaming video, and so forth. Naturally this surprised me, as I wasn't aware that AOL was content-deprived. As a matter of fact, you can type keyword just-about-anything and be taken somewhere on AOL, just as you can type just about anything on an Internet search engine and be taken to about 60,000 different places. So, no, I don't think that's really "it" behind the merger.

AOL's CEO, Steve Case, said, "This really is a historic moment... a perfect fit... a unified entity.... We will draw on one another's strengths, combining AOL's superior distribution capacity and Internet expertise with Time Warner's programming and cable network assets."

It is certainly true that the new company will offer programming from across Time Warner's vast array of resources, and is now positioned for a leadership role in whatever new form of delivery takes shape. AOL has been locked in a struggle to get AT&T (NYSE: T) to open its cable infrastructure so that consumers can have a choice of Internet Service Provider -- such as AOL. With this merger, AOL gains access to its own large cable audience. Time Warner is currently the second-largest cable provider behind AT&T, with 13 million subscribers in the U.S. So, this is a smart move for AOL from that standpoint.

One analyst suggested that "consumers win because they will now be able to get access to Time Warner content in their cars, on their cell phones, on their PDAs (personal digital assistants), and via broadband. Neither company in and of itself had the ability to deliver that." So, I'm dialing up Gone With The Wind on my Palm Pilot? Listening to torch music while I'm on hold? Come, come -- Gone With The Wind demands sweep, and scope! Why, I don't even like to see it hobbled on my TV screen, never mind on my Palm Pilot!

In looking toward the future implications of such a deal, we must ignore the present. I must ignore the fact that, for instance, in trying to hear the simple audio broadcast of the conference call given by Messrs. Case and Levin, Real Audio crashed repeatedly, the sound cutting out, with Windows telling me that the program was 'not responding,' and climaxed with the computer freezing altogether and my having to resort to the dreaded reboot. Was it the Real Audio program? The Windows Operating System? The Sony computer? The Web browser? The phone line?

Heck, a little amalgamation might make things easier to fix. At least responsibility wouldn't be diffuse. It's the same thinking used by the framers of our Constitution when they considered having two or three Presidents -- a bad idea. Too much finger-pointing.

The Future

Time Warner owns HBO, Time, People, Sports Illustrated, CNN, Warner Brothers movies, as well as TV and music studios. AOL owns Netscape, CompuServe, Digital City, MovieFone. Hmmm... let's see. What might this mean. Steve Case: Time's Man of the Year! Tiger Woods, meet Steve Case! Steve Case -- Sexiest Man Alive! Rap Master Steve! The possibilities for co-branding and synergy are mind-boggling.

Quite apart from the many possibilities for cross-promotion, marketing, commerce, and programming, I wonder if this partnership will lead to significant new technology initiatives that wouldn't be possible if the two giants had remained separate. If it is true that we will have thousands of choices, how will we choose? How will we even find out about them?

Might the technicians at the Warner Bros. studios, with their backgrounds in post-production, computer animation, and good ol' video and film production, have something to share with AOL's interactive, programming, web-savvy and ease-of-use wizards? Might we, for instance, see 3-D multifaceted polygons floating through virtual space, and on each facet a different media offering -- movie, music, games -- that we can activate by clicking (or shooting, or lasering, or winking, or yelling, or blowing a kiss)?

Practically, though, so many questions remain. How well will the two companies mesh? I once saw Gerald Levin, Time Warner's CEO, on a film industry panel with Rupert Murdoch and some other Hollywood studio CEOs. (By the way, Murdoch's recent comment that he had no interest in merging with any Internet company at these prices sent his company's stock plunging 10% yesterday.) I can no longer recall much of the panel's discussion itself, but I do remember noting that, at a certain point, it just simply became a big ego brawl. Murdoch was saying to someone else on the panel, "Well you say the line between hardware and software is blurring. That doesn't make any sense to me. But I'm not as smart as you." Similar barbs and verbal cluster-bombs were flying helter-skelter across the stage.

With that as backdrop, one wonders how the collaboration will work with Steve Case as Chairman and Gerald Levin as CEO of the new AOL Time Warner. Presumably, the men have gotten comfortable with one another over the course of the negotiations. At any rate, culture and ego clashes aside, this partnership will ensure that AOL and Time Warner won't be squeezed out by any big competitors -- as was happening to AOL in its struggle with AT&T.

However, this evening I can't escape a sinking feeling that AOL has now become so big, and its growth rate potentially so slowed, that it's no longer the stock I've come to know and love over the years. Since growth rates are calculated on a percentage basis, the bigger the monster gets, the more difficult it is for percentage growth to occur.

Hopefully this will be a beast that I'll get to know and love.

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Related Link:
The Fool's AOL-Time Warner Coverage