ANALYST WATCH: Picking the other winners in AOL-Time Warner deal

3 min read

In the wake of this week's blockbuster merger between AOL and Time Warner, leading Internet analysts are scrambling to identify other stocks that figure to benefit from what could be a tidal wave of similar mergers between old and new media firms.

Even the Internet's strongest advocates were surprised to see AOL pony up around $190 billion for a company with tentacles reaching far and wide into every conceivable medium.

The early post-game analysis suggests that shareholders will have to be patient before realizing the dramatic stock run-ups they've come to expect from AOL. The era of multiple stock splits and 200 or 300 percent gains in a single year appear to be over.

Ironically, AOL's bold move has created a paradox for the world's largest online service provider. It has simultaneously become the benchmark for Internet excellence while taking on the baggage and perks of a "traditional" media company.

With a combined market capitalization of roughly $350 billion, AOL-Time Warner now trails Microsoft Corp. (Nasdaq: MSFT), General Electric Corp. (NYSE: GE) and Cisco Systems Inc. (Nasdaq: CSCO) in paper value.

"We anticipate that AOL Time Warner will have an unprecedented ability to cross-sell among different types of media," said Michael Graham, Robertson Stephens Internet analyst. "Considering the strategic advantages of the merger, we believe the company's market value could double within a few years, potentially making it the world-beater."

Analysts and shareholders long concerned about AOL's broadband strategy can rest a little easier. Having the capacity to deliver the Internet to its 20 million registered users through cable modems at roughly 70 times the speed of a typical dial-up connection, AOL has put raised the bar for the likes of Excite@Home, AT&T and Microsoft.

"We expect heightened volatility in the short term as AOL investors sort through the new business model, some Time Warner investors take their premium and go home and others question the time frame for synergies to develop," Graham said in a research note. "But going forward, we are very comfortable putting our dollars behind this powerful new platform and skilled team."

Who else wins on this deal?

Almost as soon as the AOL-Time Warner deal was announced, brokerage firms were scrambling to find and comment on other stocks that would either win or lose in its wake.

ABN AMRO analyst Kenneth Leon suggested that set-top box maker Scientifc-Atlanta Inc. (NYSE: SFA) would be among the big winners as its is Time Warner's preferred supplier.

"All cable equipment areas related to network upgrades should benefit from this merger, but we see the most immediate spending cycle in broadband infrastructure," Leon said in a research note.

Leon said he expects the likes of ADC Telecommunications (Nasdaq: ADCT), Motorola Inc. (NYSE: MOT), Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE: NT) to pick up momentum.

Donaldson Lufkin & Jenrette analyst Mark Hassenberg said Amphenol Corp. (NYSE: APH) will take off as the AOL-Time Warner merger will spur capital investment in products that allow data and video to be fed into homes.

"The merger of Time Warner and AOL provides a new dimension to both short and long-term growth opportunities in the coaxial cable industry," Hassenberg said.

DLJ maintains a "buy" recommendation on the stock and has a 12-month price target of $92 a share. Its shares were trading around $77 a share Friday.

"Favorable pricing, cost reductions and increased volumes should cause a substantially higher gain in profits," Hassenberg said. "We do not believe the current stock price reflects the company's current results or exciting opportunities."

And finally, Lehman Brothers checked in with a positive review of NetRatings Inc. (Nasdaq: NTRT).

Analyst Monica Logani said the AOL-Time Warner deal validates the trend toward television and Internet convergence and that NetRatings is uniquely positioned to serve advertisers and content providers as this trend evolves.

She reiterated her "buy" recommendation on the stock and set a 12-month price target of $75 a share.

NetRatings shares were hovering around $40 a share Friday.