America Online's acquisition of Time Warner for more than $100-billion (U.S.) in stock passed its toughest regulatory hurdle yesterday and could be wrapped up by early January -- a year after the two companies announced their pending marriage.
That's good news for AOL, which despite its position as the world's pre-eminent Internet service provider, desperately needs to expand beyond a business model built on the questionable premise that millions of people would continue overpaying for a host of on-line services they can obtain cheaper or even free elsewhere.
Strip away all the talk of cross-platform marketing and multichannel content delivery, and you come down to a straight question of survival.
Whether it's also good news for Time Warner has been the subject of hot debate. The media and entertainment giant dwarfs AOL in size and scope, but inexplicably couldn't figure out how to develop an Internet portal for all that content it produces.
We already know what investors think. Far from being dazzled by this daring combination of new and old media powerhouses, shareholders have shown considerable skepticism that goes beyond the normal concerns about merging vastly different cultures and mindsets.
Typically, most of the stock market benefits of a major merger accrue to the shareholders of the target company. And indeed, Time Warner's stock shot up past $100 after the deal was announced. But today it trades at $74.50, not far above where it stood before AOL came calling, its then-hot stock in hand.
As for AOL, it has weathered the Internet-stock meltdown far better than its strongest competitors. But it closed yesterday at $50, nearly 40 per cent below its post-deal top.
At one point shortly after the deal was inked last January, this collarless stock transaction of 1.5 AOL shares for each Time Warner share was worth an astounding $178-billion. The current value is about $112-billion.
"When you hear that two companies are merging, maybe the best strategy is to short both of them," says George Athanassakos, professor of finance at Wilfrid Laurier University in Waterloo, Ont., who just completed an extensive study of large Canadian mergers in the roaring 1980s.
His conclusion: In the long run, the mergers fail to produce the benefits the CEOs envisioned, because real conditions never match the ideal ones on which they based their decisions.
Except for rare cases, they always miss the mark as far as shareholders are concerned.
You can bet that the folks who make Mercedes and Chrysler cars would agree, at least privately, that big mergers aren't all they're cracked up to be, after their recent dismal experience.
And as one U.S. fund manager told TheStreet.com yesterday, "This is DaimlerChrysler, except in the media space."
Unlike the global auto merger, though, the surprise nuptials between AOL and Time Warner sent seismic shocks through the executive suites of every other media, Internet, cable and telecom player in the world last January.
"Woe is me. How I can possibly compete with that?" the executives moaned to their investment bankers, always eager to play matchmaker for ever bigger and bolder marriages.
It helped persuade Seagram CEO Edgar Bronfman Jr. that it was time to sell out to Vivendi -- a company with better Internet prospects -- and it couldn't have been far from the thoughts of BCE's executives as they pursued media businesses of their own. But most others sat on the sidelines, waiting to see how this new-old media thing would work out.
Analysts were effusive in their praise of the AOL-Time Warner combination, pointing out the limitless growth potential for such a remarkable combination of Internet, media and entertainment assets. AOL would have invaluable music, video and magazine content to push down the pipeline to more than 26 million subscribers. And better yet, it would have a leg up on any competitor trying to secure high-speed access to all those Time Warner cable consumers, 20 million U.S. households at last count.
But in approving the merger yesterday after a considerably lengthy review and endless bargaining over concessions, the U.S. Federal Trade Commission won the companies' agreement to open up the pipelines to Internet and interactive TV competitors at favourable terms. Under the strict conditions, AOL-Time Warner should have no opportunity to monopolize the high-speed gateway.
The FTC reportedly had grave reservations about allowing the deal to proceed, even with the concessions. But no regulator has yet figured out how the media landscape is going to look in coming years or how competitive it's going to be.
AOL, which is famous for its hardball tactics, had also taken an interesting step of its own, starting talks to acquire DirecTV, in which it already holds a non-voting stake. The message was simple: Keep us from buying Time Warner, and we'll switch our sights to the biggest satellite broadcaster in the country.
There's always more than one way to skin a cat.