Time Warner/EMI Drop Merger Talks

It’s like a scene out of The Graduate.

Media giant Time Warner Inc., left EMI Music Group standing at the altar
Thursday to allay the European Commission’s concerns over the proposed
merger deal with America Online, Inc.

The commission is looking at the maneuvers by Time Warner with great
interest, but hold the two merger deals as distinct, and therefore
separate, issues.

“Because there were related sectoral elements and competition concerns in
both cases, there could be some effect, but the two cases are, in the end,
separate,” said a source at the European Commission who wished to remain
anonymous. “It will be up to the Commission investigators to sort out
these issues in the time remaining.

“Remember, there were some pretty big ‘remedies’ on the table for the Time
Warner-EMI merger, which might have also had an effect on Time Warner-AOL,
but are no longer part of the mix,” the source said. “As the Commission
said yesterday on AOL-TW: ‘All options are still open for the moment.’ ”

In a joint statement to the media, Time Warner and EMI stated they had
ended their accord and were withdrawing their official notification to the
European Union’s executive branch.

According to Eric Nicoli, EMI chairman, the price for EC approval
required the two companies to shed too much of its business. Both had
already agreed to lose some of its distribution network and record labels.

“The withdrawal of our application allows additional time to reassess
regulators’ concerns and to pursue solutions simultaneously in Europe and
the U.S.,” Nicoli said. “We have been, and will continue to be, flexible
in responding to the European Commission’s concerns. However, any
concessions that are ultimately made must be consistent with our
shareholder value objectives.”

However, both companies promised to continue discussions to reach a new
agreement, which was stymied by the commission’s fears about a music
conglomerate that would dominate the European markets, an EC statement stated.

“The commission opened an in-depth investigation over concerns that the
operation could create a collective dominant position in national European
markets for recording music, a single dominant position in national markets
for music publishing, and a single dominant position in the markets for
online music- and software-based music,” the statement read.

The news had a predictable affect on the stock market. EMI stock dropped 2.4 percent this morning after the news was released, while Time Warner stock increased by 3.14 percent.

It’s not a bad place for Time Warner to be, stuck between the merger
options of two attractive companies; one that would create a music and
entertainment empire, and another that would create an Internet and
entertainment empire.

AOL obviously had more to offer, with a ready-made worldwide audience of
more than 24 million subscribers. According to a first quarter preview
announcement by Goldman, Sachs & Company Investments, AOL is on par to
acquire 28 million subscribers and has an advertising and e-commerce
backlog of $3 billion.

Attractive, indeed.

Time Warner was stuck with an ugly two-front war to merge its company with
AOL and with EMI, one the company would likely have lost on both sides if
it continued in the same vein. European authorities had already announced
its opposition to the $20 billion EMI deal and had made a preliminary
decision Sept. 18 to forbid the $135 billion AOL deal, too.

The school bus ride off into the sunset ala Dustin Hoffman may be in the
script for AOL and Time Warner, but is by no means certain to make the
final draft in this movie adaptation. Although media and financial
analysts predict merger approval, the EC has until Oct. 24 to decide on the
fate of the AOL/Time Warne

r merger.

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