AOL-Time Warner: Done Deal Or Done For?

I’ve never seriously thought the $143 billion merger of America Online
and Time Warner could be derailed – and I
still believe the deal will go through – but it’s clear that European
regulators may pose a genuine threat to the proposed marriage of old and new
media giants.

Perhaps the European Commission merely is in full shakedown mode with its
“preliminary recommendation” that the merger be blocked unless AOL and Time
Warner guarantee competitors better access to the online sale of music.

Nonetheless, the fact is that the EC was instrumental in deep-sixing the
$152 billion merger between U.S. telecom players MCI WorldCom and Sprint.
That deal, announced nearly a year ago, was abandoned in July in the face of
EC resistance and a lawsuit filed by the U.S. Justice Department.

So it’s worth considering what might happen to shares of AOL should the Time
Warner merger fall apart.

In the cases of MCI WorldCom and Sprint, both stocks have dropped
considerably since that merger was called off on July 13. Through early
Tuesday afternoon, WCOM was trading at $28.63 per share, down 36% from its
July 12 close, while FON is down 41% in that same time period.

However, the initial announcement of the WorldCom-Sprint union early last
October was greeted enthusiastically by investors, with both stocks rising
in ensuing weeks. Only after it was clear early this year that U.S. and
European regulators had problems with the proposed WorldCom acquisition of
Sprint did both stocks begin drifting down in price.

AOL and Time Warner’s scenario was different, in large part because it was
testing uncharted waters. Investors didn’t know what to make of a merger
between a high-growth digital media company and a slower-growth old media
titan. Hence TWX shares have been up and down since January, while AOL
dropped in the weeks after the Jan. 10 announcement, surged up in the
spring, and since April have bounced almost exclusively between $50 and $60.

Shares of AOL were trading early Tuesday afternoon at $55.44, or 25% below
their Jan. 7 closing price. In the past week, as it’s become clear that the
EC opposed the merger unless competitive concerns were addressed, AOL shares
have barely budged.

I believe the market remains ambivalent about the AOL-Time Warner deal.
Thus, due primarily to investor relief, I would expect AOL shares to rise if
the proposed union is abandoned, for on its own, AOL is a known (and quite
successful) quantity.

But am I still (reasonably) certain there will be a merger.

I’m curious, though, what readers have to say about it. Will the deal go
through? And if not, what will be the market’s reaction? Let me know what
you think. Mail me at cnerney@internet.com.