At least for now, however, the engagement is far from being called off, even though the AOL shares that drove the transaction have slid nearly 30 percent since the day the marriage was proposed Jan. 10.
Company executives, investors and others with a stake in the deal remain optimistic for several reasons. Topping the list is that the agreement does not include a "collar," meaning there is no set price at which a decline in AOL shares automatically would trigger a breakup.
"Almost all tech mergers that are stock swaps are fixed-exchange deals," said Karl Will, who oversees technology and Internet mergers and acquisitions for Deutsche Banc Alex Brown. "As a result, the board has little leeway in not pursuing a shareholder vote."
Will, whose bank is not involved in the merger, said that fixed-exchange deals also prohibit renegotiation of terms. In addition, the deal is not scheduled to close for several months, meaning there is plenty of time for AOL shares to recover, or at least level off.
Even though the slide in AOL and Time Warner shares has been particularly steep, he and others note that it is common for the shares in companies that are merging to slip after the initial euphoria wears off. "AOL's stock may have declined a bit in the month, but tech stocks are so volatile that AOL may recover nicely before the shareholder vote," Will said.
He added that there have been cases in which mergers have been completed despite a significant drop in the companies' stock. For example, software maker Veritas had a walkaway provision in its acquisition agreement with OpenVision. Although the stock fell below the designated price, OpenVision still presented the deal to shareholders, who approved it.
On the other hand, a merger between Lycos and USA Networks was scrapped last May because of resistance from Lycos shareholders. Shares of Lycos had tumbled by one-third after the merger was announced in February.
Those involved in the AOL deal say the merger is a very different situation. "In no way is this deal in jeopardy," said Scott Schoelzel, portfolio manager of the Janus Twenty Fund.
Janus Twenty, one of 14 funds in the Janus Capital family, holds a 1.52 percent stake in Time Warner. The entire Janus Capital family, meanwhile, is the largest Time Warner institutional investor, with a 7.75 percent stake.
Based on their market capitalizations at the time of the announcement, a combined AOL Time Warner would have a value of about $350 billion. Today, the combined company would be worth closer to $220 billion. Under the deal, Time Warner shareholders will receive 1.5 shares in the combined company for each share they hold, while AOL shareholders will receive one share.
The primary reason for the reduction in market value is a steady slide in AOL shares. Currently trading around $53, AOL shares are down 28 percent since Time Warner chairman Gerald Levin and AOL chairman Steve Case shook hands and grinned for photographers during their press conference. At the current price, AOL shares are trading at almost half their 52-week high of $95.81.
Because Time Warner's shares now move in lockstep with AOL, they also have taken a hit. Trading around $65 before the merger announcement, the company's shares surged to $92.25 on Jan. 10.
Today, Time Warner shares fetch about $77, a decline of 15 percent. Viewed another way, the shares are trading about 21 percent above their premerger price--about half the pop they received as a result of the merger.
And that's the rub. If the stock continues to erode, Time Warner shareholders could start to question the merits of the deal. Will shareholders become concerned if the stock drops another 15 percent or 5 percent, or are they focused more on the long-term benefits of owning a piece of the combined company?
Although Janus' Schoelzel was "a little surprised" by the stocks' performance, he said that the merger makes sense, and that it will be a good investment in the long run.
"If your time horizon is two months, then I don't know where the stock will be, but if it's two years, I wouldn't be surprised if this becomes a global cornerstone investment," Schoelzel said.
He speculated that the pressure comes from AOL investors concerned about the company's growth slowing dramatically. Following the merger announcement, some investors began to question the "Net premium" on AOL's stock because the combined company will be a mix of Net properties and traditional media assets.
Conversely, said Schoelzel, some Time Warner investors may perceive that the Internet is just a passing trend.
Some investors grow wary
Though Schoelzel remains optimistic, many other investors are unhappy with the post-merger slide in the shares.
"What do you get when you cross an elephant with a rhinoceros? AOL-TWX. Pretty gruesome," stated one posting to a Net bulletin board. "But this universe all came from a big bang didn't it. AOL needed broadband. TWX needed a decent Web site. Hope it's synergy and supernova rather than crash and burn."
Another message expressed hope that the deal would be canceled: "Now maybe TWXers will stop laughing as they see TWX sinking right with AOL. Hope you guys liked it when ya were in the $100s a couple of weeks ago, cause ya ain't gonna see that again for a hell of a long time."
Even some larger shareholders are studying the deal and targeting areas that bear close scrutiny.
"One consideration is the growth rate of the combined companies," said Thanh Tran, an analyst for Alliance Capital, whose parent company, Axa Financial, holds a 1.5 percent stake in Time Warner.
"Management said that the companies would grow at a combined rate of 30 percent a year," Tran said, adding that AOL had been growing about 60 percent as an independent company.
In addition, there are several regulatory hurdles standing in the way of the merger's completion--each of which could trip up the process.
"The same considerations for the Time-AOL merger apply to any merger, such as management, culture and (the task) of combining two very large companies, as well as government agencies like the Department of Justice, the FTC and FCC," Tran said. "So there's a lot of issues to resolve."
The Federal Trade Commission was assigned to the case only a few days ago, and it will take three to four months for the merger to be reviewed, said one source familiar with the deal. No dates have been set for the shareholder votes.
If either party calls off the deal, they face a breakup fee of $9.5 billion; that translates to the standard 2.7 percent breakup fee usually assigned in mergers, one source said.
Even if the deal falls through, Time Warner executives already have captured some financial gains. In an unusual move, Time Warner executives were allowed to exercise their unvested stock options after the deal was announced, rather than having to wait for the deal to close.