Wednesday, January 12, 2000
AOL stock slide cuts value of Time Warner deal
Investors worried about growth rate
BY IANTHE JEANNE DUGAN
The Washington Post
NEW YORK — Shares of America Online Inc. fell more than 11 percent Tuesday, one day after the Internet pioneer announced a record $178 billion deal to buy media conglomerate Time Warner Inc..
The drop depleted the value of the very currency AOL intends to use to leap from cyberspace into the real world.
AOL wants to be king of the media world — “new media” is passe in the eyes of Chief Executive Steve Case. But analysts said the reaction of investors — AOL's shares have sunk about 14 percent since the deal was unveiled — demonstrates the dangers that lurk as a new breed of entrepreneurs attempts to build a bridge from the Internet world.
“Most people view Net companies as having an infinite horizon,” said Ned Riley, chief investment strategist at State Street Global Advisors, which is one of the biggest owners of both AOL and Time Warner stock. “The new company is supposed to have a growth rate of 30 percent a year. That's great for a mundane media company, but mediocre for an Internet company.”
Since going public eight years ago, shares of AOL have surged more than 50,000 percent, riding the giddiness over companies that would lead the way as the economy evolved into one pegged to the Internet. AOL's revenue more than doubled annually over the past five years, while Time Warner's inched up about 16 percent.
Because AOL is paying entirely in stock — and assuming about $17 billion in debt — the decline in the value of AOL's shares also could hurt Time Warner shareholders, who will be paid 1.5 AOL shares for each of their current shares.
At Friday's closing prices, that ratio valued Time Warner at $110.60 a share. AOL's close of $64.50 a share Tuesday would only fetch $96.75 for Time Warner shareholders — knocking $21 billion off the total value of the deal in less than 48 hours.
Time Warner shares fell 5.5 percent Tuesday, after rising about 40 percent Monday.
In the first year as a combined company, AOL Time Warner executives say, it expects to have $40 billion in revenue. About 20 percent of that would be from AOL.
The bull market has been driven as people threw money at stocks that had the most potential to grow the fastest.
So the arithmetic that dampened AOL's stock price Tuesday was simple. Before, 100 percent of AOL was growing at 50 percent a year. “Now, 20 percent will grow 50 percent a year and the other 80 percent will grow in the teens,” said Bill Burnham, an analyst at Softbank Partners, the U.S. division of the Japanese conglomerate that is invested in several Internet companies including Yahoo.
The decline, much of it apparently due to the reactions of individual investors, might have reflected not only concern about the deal but a certain disappointment in AOL's change of identity. The stock has been a favorite of people who want not only a piece of the highflying Internet, but a safe piece.
AOL, unlike many dot-com stocks, has built a solid earnings foundation while still carrying the aura of a realm many consider risky. They could live a bit on the wild side, but respectably. By joining up with Time Warner, AOL might have become, for some, no longer exciting.
That attitude pervaded Internet chat rooms Tuesday, as many investors lamented the deal.
“Not loving my AOL today,” wrote one investor who also wondered who would vote to cut a company's growth in half and assume a huge debt load.
In about two-thirds of all acquisitions, the acquirers' stock price falls the day after a deal is announced and that usually precedes a more severe drop, said Mark L. Sirower, an analyst at Boston Consulting Group.
“Investors are generally skeptical that the buyers will be able to maintain the value of the businesses and achieve the synergies to justify the premiums,” he said.
Kroger to put 'Cosmo' under wrap
AOL stock slide cuts value of Time Warner deal
Critics say merger will stifle diversity
Media getting feet wet on Net
Office Suites Plus geared to flexibility, convenience
Ameritech lowers telephone rates
Bank One earnings drop likely may drop
TRISTATE BUSINESS SUMMARY
INDUSTRY NOTES: RETAIL
PEOPLE ON THE MOVE
Bayer must back off aspirin claims
TRISTATE MARKET SPOTLIGHT
