AOL to buy Time Warner in historic merger

In a stunning announcement, America Online says it will acquire Time Warner to create the world's largest media company.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
5 min read
In a stunning announcement, America Online said today that it will acquire Time Warner to create the world's largest media company.

The new company will You've got Time Warner be called AOL Time Warner and will combine AOL's online services with Time Warner's vast media and cable assets. In a world where online services, media and entertainment are rapidly converging, the new company could have almost unparalleled resources.

"It is probably the most significant development in the Internet business world to date," said Phil Leigh, an analyst at Raymond James. "If it hasn't been evident to most of us yet, it should be obvious to us now that the Internet is about audio and video and not just merely text and graphics."

News of the merger, the largest in corporate history, sent Time Warner's stock up at "dot-com" speed, with shares rising $25.31, or 39 percent, to $90.06. The stock has traded as high as $78.63 and as low as $57.19 during the past 52 weeks.

AOL, on the other hand, rose early but ended the day lower, falling $1.88, or more than 2 percent, to $71.88. The stock has traded as high as $95.81 and as low as $32.50 during the past 52 weeks.

The purchase, an all-stock deal, amounted to more than $160 billion based on today's trading prices. According to both companies, the new firm will have an estimated combined value of $350 billion.

For Time Warner, Steve Case and Gerald Levin the deal represents a marked departure from previous attempts to become a Net player. The media giant first ventured online with Pathfinder, an all-in-one site that brought the company's magazines and news properties together. Time Warner abruptly dropped that strategy, saying it planned instead to launch a series of "vertical hubs" focusing on topics such as news and personal finance. Its first niche hub to launch was Entertaindom.com.

AOL, the clear leader of dial-up Internet service providers, has been positioning itself for the impending broadband explosion, cutting deals with satellite delivery firms and telecommunications companies that offer digital subscriber line (DSL) services. AOL also has focused on gaining access to cable services controlled by AT&T and other cable companies. The Time Warner deal gives AOL access to those services.

The companies said that, with respect to broadband access, AOL Time Warner will be committed to giving consumers a choice of ISPs and content, and they hope this merger will persuade all companies operating broadband platforms to also open their pipes to competing ISPs.

Time Warner to shutter Pathfinder "What you'll see early on and very quickly are a lot of things AOL can do together with new forms of functionality that we have not seen in the broadband cable industry," Gerald Levin, Time Warner's chairman and chief executive, told a news conference today.

Today's deal also gives AOL access to Time Warner's media properties such as CNN, Warner Bros., Sports Illustrated and many others.

The new company will have more than 100 million paying subscribers, including AOL's dial-up customers and Time Warner's cable and magazine subscribers, AOL chief financial officer J. Michael Kelly said at the news conference.

Steve Case, the chairman and chief executive of AOL, will become chairman of the board of the new company. Time Warner's Levin will become AOL Time Warner's CEO.

As chairman, Case will play an active role in helping to build and lead AOL Time Warner, focusing particularly on the technological developments and policy initiatives driving the global expansion of the interactive medium. As chief executive, Levin will set the company's strategy, working closely with Case, and will oversee the management of the company. Levin will report to the board, which will consist of 16 members, with eight appointed by each of the current AOL and Time Warner boards.

Time Warner president Richard Parsons and AOL president and chief operating officer Bob Pittman will be co-chief operating officers of AOL Time Warner.

"This strategic combination with AOL accelerates the digital transformation of Time Warner by giving our creative and content businesses the widest possible canvas," Levin said in a statement.

AOL Time Warner
at a glance

Chairman: Steve Case, America Online  
CEO: Gerald Levin, Time Warner  
Employees: more than 80,000 combined  
Annual sales: more than $140 billion combined  
Market capitalization: approximately $350
Ticker: AOL

Sources: Bloomberg, Reuters

Under the terms of the definitive merger agreement approved by unanimous votes at meetings of each company's board of directors, Time Warner and America Online stock will be converted to AOL Time Warner stock, with Time Warner shareholders receiving 1.5 shares of AOL Time Warner stock for each share of Time Warner stock they own. AOL shareholders will receive one share of AOL Time Warner stock for each share of AOL stock they own.

Analysts said that the Net landscape is likely to change rapidly over the course of the year as large capitalized Internet firms look to acquire media companies. Web portal Yahoo has a market cap of $107 billion--far greater than some leading media companies, including Disney, which has a cap of $64.19 billion.

"About 18 months ago, the feeling was that some of the media companies would buy Internet companies, but what happened is that the valuations got so reversed that it is really the opposite that is likely," said Raymond James' Leigh. "With 55 percent of the new company's stock being controlled by AOL shareholders, I think AOL is in the driver's seat. Today's deal is psychologically a big step, and now it is likely that we will see others come along."

The merger will be effected on a tax-free basis to shareholders. When complete, AOL's shareholders will own approximately 55 percent, and Time Warner's shareholders will own approximately 45 percent of the new company.

The stock will be traded under the symbol "AOL" on the New York Stock Exchange.

The transaction is subject to certain closing conditions, including regulatory approvals and the approval of AOL and Time Warner shareholders. It is expected to close by the end of the year, according to AOL's Kelly.

Ted Turner, vice chairman of Time Warner, has agreed to vote his Time Warner shares, representing approximately 9 percent of the company's outstanding common stock, in favor of the merger. Turner will become vice chairman of AOL Time Warner.

With the completion of the merger, AOL Time Warner will be positioned to speed the development of the interactive medium.

Pittman talks "We will accelerate the development of Time Warner's cable broadband assets by bringing AOL's hallmark ease-of-use to this platform," Pittman said in a statement. "We expect America Online to help drive the growth of cable broadband audiences, and we will use our combined infrastructure and cross-promotional strengths to enhance the growth and development of both America Online and Time Warner brands around the world."

AOL and Time Warner also announced new marketing, commerce, content and promotional agreements that will immediately expand various relationships already in place between the two companies.

Among several marketing agreements, CNN.com and Entertaindom programming will be featured prominently on various AOL services; AOL members will have access to a wide range of Time Warner promotional music clips from Time Warner's selection of popular artists; and broadband CNN news content will be distributed on AOL Plus, the rich media content offering designed for AOL members connecting via broadband, when it launches this spring.