The report was written by Internet analyst Henry Blodget and media analyst Jessica Reif Cohen. Blodget is one of the most bullish Internet analysts, but he also is among the most influential.
In general, the analysts touted the marriage as positive in almost every area the two companies touch. The combined company would become a front-line player for existing businesses, such as Internet access, e-commerce and advertising-driven content, the report said. AOL Time Warner is poised to become an influential player in new businesses in areas such as broadband cable access, digital music distribution and interactive television.
"If the integration is successful (not a given, certainly), we believe that the market will ultimately value the company less as a collection of disparate media and Internet properties and more as the dominant platform supporting consumer interactivity, a platform around which other services will eventually standardize," the report read.
But a merger of this magnitude is vulnerable to potential problems, the report warned. It remains unknown how the senior management reporting chain will be structured, and the 50-50 representation from both companies on the new company's board of directors could lead to stalemates.
In addition, the vesting of Time Warner stock options on the day of the merger announcement will present a challenge, the report said.
"This could obviously encourage either apathy or exodus at the senior management level (and contributes to the integration risk)," it read. "But AOL and Time Warner management believes it can incent the critical parties to stay."
The investment bank maintained its "buy" rating on AOL and set a 12- to 18-month price target of $90. Merrill Lynch upgraded Time Warner to a "buy" with a 12- to 18-month target of $135. The bank downgraded Time Warner stock to an "accumulate" last November.
The report comes as AOL's stock continues its slide after announcing it would acquire Time Warner. This is the result of investor confusion, according to the report. On the one hand, Internet investors have stepped back from AOL's stock because of concerns that Time Warner's myriad businesses would decelerate its historically skyrocketing valuations, the report said. On the other hand, media investors continue to consider AOL's stock overvalued.
"The combined company's growth will be too slow to interest some of AOL's momentum-driven technology investors, and at $75 the stock looked too expensive to appeal to many of Time Warner's traditional media investors," the report said.
Confusion aside, Blodget and Reif Cohen are expecting long-term benefits from the merged company.
Wall Street responded favorably today. AOL jumped $7.13 to $56.06, and Time Warner rose $7.25 to $81.06.