Update: AOL, Time Warner to merge in $350B deal

America Online Inc. and Time Warner Inc. today announced plans to merge in an all-stock deal the companies value at $350 billion.

"If there is an ultimate in convergence, this is it," said Alan Alper, analyst at Gomez Advisors Inc. in Lincoln, Mass.

The new company, to be called AOL Time Warner Inc., will have combined revenues of more than $30 billion, the companies said in a joint statement.

AOL Chairman and CEO Steve Case will serve as chairman of the new company, and Time Warner Chairman and CEO Gerald Levin will be CEO of AOL Time Warner, the companies said.

If their deal is successful, the companies see themselves as positioned to speed development of the Internet and its related businesses, according to the joint statement, with AOL's CEO Case saying it will "fundamentally change the way people get information, communicate with others, buy products and are entertained."

The merger will give AOL, the world's largest online access company, a new broadband distribution platform for its services, as well as new subscribers through access to Time Warner's media outlets, the companies said. Time Warner's businesses include cable networks, publishing, music, film, cable and digital media. Some of its best-known properties are the publications Time, Sports Illustrated, Fortune Magazine, and People, as well as the cable television networks CNN and HBO, the movie company Warner Brothers and Warner Music.

"AOL has been dominant over time," Alper said. "The only chink in its armor is in the area of broadband, and Time Warner not only has a lot of cable holdings that produce television shows, but also has a lot of companies that provide cable services to the home."

When the transaction is complete, America Online's shareholders will own approximately 55% and Time Warner's shareholders will own approximately 45% of AOL Time Warner.

"With this acqusition, Time Warner has all the pieces in place to become the telecommunications company for the 21st century," said Robert Rosenberg, telecommunications analyst and president of Insight Research Corp. in Parsippany, N.J. "It is now content-rich and it's working on an advanced network architecture. AOL has a loyal customer base with a very young population base associated with it. This is a very enviable position for Time Warner to be in, as the online/mixed media world develops. As for AOL, its content just got richer."

Under the terms of a definitive merger agreement already approved by both companies' boards of directors, Time Warner shareholders and AOL shareholders will be able to exchange their shares for stock in the new company. Time Warner shareholders will receive 1.5 shares of AOL Time Warner for each share of Time Warner stock they own, and America Online shareholders will receive one share of AOL Time Warner stock for each share of America Online stock they own, the companies said.

The merger still needs the approval of both companies' shareholders as well as the appropriate regulatory approvals. The companies expect the deal to close by the end of the year. Ted Turner, vice chairman of Time Warner, has agreed to vote his 9% of Time Warner common stock in favor of the merger, the companies said. The merger will be accounted for as a purchase transaction and is expected to be accretive to America Online's cash earnings per share before the amortization of goodwill.

"There [don't] appear to be any losers in this deal," Jeff Kagan, a telecommunications analyst in Marietta, Ga., said in a statement released about the merger. "This blend of the old and the new should effectively strengthen both companies. The telephone, television, computer, news and entertainment industries are restructuring and blending."

Separately, the companies also announced a series of marketing, commerce, content and promotional agreements. They include giving AOL members access to Time Warner promotional music clips and distributing broadband CNN content for AOL Plus, AOL's new offering for AOL customers who connect via broadband.

"This gives AOL access to a large range of content and Time Warner a channel for its content," said Stephen Adshead, a London-based analyst with the U.K. consulting company Datamonitor. "Another advantage for AOL is that it will gain access to Time Warner's cable network, and as we move into the broadband world that will become increasingly important."

(Douglas F. Gray, in London, contributed to this report.)

Copyright © 2000 IDG Communications, Inc.

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