Nearly a year after the historic deal was announced, it looks like the merger of America Online
and Time Warner
finally is near consummation.
However, not before a gauntlet of government regulators on both sides of the Atlantic pummeled the two media giants to force agreements and concessions designed to protect competitors providing Internet cable access and music downloads.
With Thursday’s 5-0 approval by the U.S. Federal Trade Commission, only the Federal Communications Commission can still derail the $112.5 billion deal. But FCC Chairman William Kennard says he expects the commission to sign off on the merger before New Year’s.
Once that happens, the world’s leading online access provider and second-largest cable company in the U.S. can operate as one entity – AOL Time Warner, a new millennium digital media powerhouse.
Of course, it will do so under a consent order that requires Time Warner to allow at least one AOL competitor to offer cable access on its lines in any market before AOL can offer service over those same cable lines. Further, Time Warner also must allow two more competing access providers use of its cable lines in that market within 90 days of AOL launching service.
This isn’t just a formality. The FTC will have veto power over AOL Time Warner’s contracts with competitors, and can appoint a trustee to negotiate on behalf of Time Warner if the second and third competitors aren’t on board within the 90-day time frame.
AOL officials justifiably have argued that such requirements would put them at a distinct negotiating disadvantage, since competitors would be fully aware of the regulatory sword hanging over the company’s head and thus could drive a hard bargain.
Problematic as that might be, it wasn’t enough of a perceived burden to cause AOL and Time Warner to walk away from the merger. Understandably so, for the reasons that compelled the deal back in January still exist.
AOL has an urgent need to offer broadband access to more of its 26 million members. With Time Warner’s cable operation, second only to AT&T in the U.S., AOL suddenly becomes a top broadband provider.
AOL also benefits from Time Warner’s vast media holdings, including the HBO and CNN cable television channels, Warner Bros. movie studio, Warner Music Group and print publications such as Time and People magazines. That’s a lot of sources of content, but it’s the multimedia properties – those for which broadband was created – that AOL really wants.
Time Warner, meanwhile, gains an instant, strong foothold in cyberspace. It also gets a direct marketing pipeline to nearly 30 million subscribers of AOL and its CompuServe subsidiary.
Financially, neither company is a weak sister. Time Warner’s revenue growth (6% in the first three quarters this year) may not excite Internet investors who set the bar at 50% or even 100%, but find a ‘Net company that can match sales of $20.5 billion over three quarters. Only Cisco Systems, easily the biggest revenue generator among Internet players, can stay in that game.
Both companies also pass the profitability test. AOL has posted profits for 10 consecutive quarters, usually beating estimates, while TWX has notched seven straight quarters in the black.
You can’t ask for a stronger partnership – on paper, at least. Now it comes down to execution. As an investor, I don’t see how you can bet against AOL Time Warner.