Gerald Levin of Time Warner was posing tieless at this week's news conference, trying his best to look like an Internet guy, while America Online's Steve Case was sporting a tidy corporate cravat. But it's still far from clear who will be wearing the pants in this corporate family, and whether they'll be blue jeans or pinstripes.
At first blush the AOL merger with Time Warner certainly looks like the triumph of ''new media'' over ''old media.'' A company that just five years ago had no earnings and was best known for delivering busy signals to its infuriated customers has acquired perhaps the biggest and best ''old media'' company in America. The company whose founder coined the term ''the American Century'' seems to have thrown in the towel, two weeks into the 21st century.
Unlike many of the recent giant mergers, it's hard to overhype the significance of Monday's announcement. The nation's leading Internet company has combined forces with a ''content'' powerhouse that produces films, television programs and magazines and owns the biggest cable system in the country. At the instant the merger was announced, other big media and Internet companies began searching for partners, too -- and it's certain that the AOL-Time Warner combination will trigger similar deals.
But it's possible, too, that this deal really signals ''the end of the beginning'' of the Internet era. The days when stock valuations could soar like dirigibles above actual earnings may be waning. That's because AOL has decided, in effect, to trade the blue horizon of imagined future earnings that's typical of the Internet world for the real assets and income stream of its new partner.
Careful market watchers will be looking, over the next days and weeks, to see where the valuation of the new AOL will settle. Last Friday, before the merger, AOL was trading at more than 50 times its earnings before interest, taxes, depreciation and amortization, while Time Warner was trading at about 15 times EBITDA, as it's known.
How will the combined company be judged: At the anything-goes level of the Internet, or the less-stratospheric level of other communications companies? Case said in an interview this week that ''it will be somewhere in the middle.'' He explained that ''we anticipate some multiple-compression,'' and that on a pro-forma basis, the combined company would probably trade at 27 or 28 times EBITDA. But he said he hoped investors would ''see the revenue upside'' and that valuation would be closer to AOL's level than Time Warner's.
The market's initial response was that AOL's decision to embrace an old media company had made it less valuable -- its stock fell about 2.7 percent and it lost roughly $4.5 billion in market capitalization. Time Warner, in contrast, experienced a halo effect from its association with the Internet's most famous name: Its stock climbed about 39 percent and it added about $32 billion to its total market capitalization. When you net out the two swings, that means the market valued the combined companies at more than $25 billion above what they were worth separately Monday morning.
I'm not sure that premium will hold up over the coming months -- especially if the market begins to judge the combined company in terms of its actual sources of revenues and earnings. As Case himself notes, Time Warner is contributing about 80 percent of the combined company's revenues.
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