AOL Investors Confident Despite Likely Bad News

AOL Time Warner executives confirmed the $6.75 billion
cash purchase of its European venture and dished out plenty of bad news at
a conference late Monday afternoon.

Executives at the media giant are hoping a buyout of AOL Europe, a joint
venture between AOL Time Warner and Germany-based Bertelsmann, will be
looked upon with favor by Wall Street analysts, who are likely going to be
disappointed by AOL’s financial status and looking for a reason to keep
the company in their portfolios.

According to
officials, the recession is the reason for only five to eight percent
growth in 2001 and eight to 12 percent earnings before interest, taxes,
depreciation and amortization (EBITDA).

Richard Parsons, AOL’s incoming chief executive officer (replacing
outgoing Gerald Levin), said AOL was, in effect, penalized by the
economic downturn in 2001, but predicts it will be the first to rebound.

“AOL Time Warner performed well in 2001, despite the current environment,” Parsons
said.

As predicted, Parsons is taking a conservative approach to 2002, promising
nothing but hoping for the best. He expects zero growth overall in the
first quarter of 2002, as well as zero growth in advertising sales for all
of 2002.

Wayne Pace, AOL’s newly-minted chief financial officer, had the
uneviable job of informing investors of the $40 to $60 billion charge it would
be taking as it revamps its accounting practices. The one-time goodwill
charge, Pace said, “will not affect our operations or investment rating.”

Pace also said continued investments to increase market share in the company’s many
divisions would not be hampered by the losses and expected marginal growth.

Wall Street analysts, meanwhile, have been cutting their own outlook
estimates for the media company, which had called for double-digit growth
expectations when the merger of America Online and Time Warner Inc. was
approved by federal regulators last year.

Investment firm Goldman Sachs & Co. remains confident in the company
although it reported that this is in comparison with the other online media
companies, which performed less than admirably in 2001.

“We continue to recommend AOL and believe it is the most attractive stock
in both our Internet New Media and Entertainment universes, having
significantly underperformed its peers during the recent
cyclical rally,” GS’ Monday morning report said. “Despite slowing
growth, AOL remains one of the fastest growing media companies —
benefiting from a diverse business mix that relies heavily on
subscription-based businesses, cost cutting, and recent film success.”

Deutsch Bank, on the other hand, is downgrading AOL, citing the new management’s difficulties in showing gains in most of the combined company’s
divisions, especially online advertising.

In spite of analyst worries, AOL Time Warner still remains a hot stock for
investors. Despite the downgrade by Deutsch Bank, it is still rated a
“strong buy,” while Goldman Sachs kept the company on its “recommended” list.

Bear Stearns, J.P. Morgan and Kaufman Bros., on the other hand, have gone
so far as to upgrade their AOL opinions to “buy.”

The marriage
of AOL and Time Warner
was touted by executives on both sides to be the
perfect marriage of old media and new. Cross-promotional deals between
Time Warner’s extensive cable system and publishing departments and AOL’s
more than 33 million Internet customers were supposed to marshal in a new
era of advertising.

Unfortunately, the merger culminated right about the time the dot com
explosion was turning into an implosion. Online advertising, across the
board, dropped considerably, putting many media companies on the defensive.

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