In one of the largest mergers ever, America Online(NYSE: AOL) and Time Warner(NYSE: TWX) announced plans to combine as equals in a stock deal worth $350 billion.
The deal values Time Warner at about $110 per share -- a 70% premium over its closing price Friday.
Bringing together online media leader AOL with traditional media giant Time Warner creates a global communications company that offers original content, e-commerce, and entertainment services across the full range of media platforms, including the Internet, television, movies, magazines, books, and music. The new company will be called AOL Time Warner.
Time Warner is the world's biggest media and entertainment company as well as the largest cable operator in the U.S., at least until AT&T(NYSE: T) completes its MediaOne(NYSE: UMG) acquisition. AOL is the largest online services provider with more than 20 million subscribers. It's also one of the few Internet companies making a tidy profit and is widely considered a blue-chip company.
The combined companies' brand names include household properties like Time, CNN, CompuServe, Warner Brothers, Netscape, Sports Illustrated, People, HBO, TNT, and Fortune.
Together, the companies will have revenues topping $30 billion and a market value around $250 billion -- probably a lot more by the end of the day. Right now, only a handful of U.S. companies are worth more, including Microsoft(Nasdaq: MSFT), Cisco(Nasdaq: CSCO), General Electric(NYSE: GE), Intel (Nasdaq: INTC), Wal-Mart(NYSE: WMT), and Exxon Mobil(NYSE: XOM).
Shares of New York-based Time Warner shot up at least $30 in early hours trading to more than $95, and Dulles, Virginia-based AOL jumped $13 to about $85. Generally, when investors react this favorably to a merger, the two players are seen as contenders able to add real value to each other's businesses.
For years, investors have speculated that AOL would merge with a communications powerhouse like AT&T or software king Microsoft. But the deal with Time Warner creates a combination that not only preserves AOL's independence more than the other combinations would have, but is more likely to receive regulatory approval -- though investors can certainly expect scrutiny. In addition, it gives AOL a vast new distribution network for its services.
Consider the time AOL has spent wrapping up broadband (high-speed Internet access) agreements with players like the regional bell operating companies. With access to Time Warner's cable lines, AOL should be able to provide broadband services nationwide. The merger may also make it tougher for AT&T to round out its nationwide broadband offering since it doesn't yet have a big cable deal with Time Warner.
Meanwhile, Time Warner, which has some Internet properties such as its high-speed access service Road Runner, gets online in the biggest way imaginable.
Steve Case, AOL chairman and chief executive, will become chairman of the new company, and Gerald Levin, Time Warner's chairman and chief executive, will become AOL Time Warner's CEO.
Under terms of the deal, Time Warner shareholders will receive 1.5 shares of the new company for each Time Warner share they own, and AOL shareholders will receive one share of the new company for each AOL share they own. The merger will be recorded on a tax-free basis to shareholders. When complete, AOL shareholders will own 55% of the new company, with Time Warner owning 45%.
The deal, expected to close this year, is subject to regulatory approval, and is expected to be immediately accretive to AOL (before amortization charges). The company will be traded on the New York Stock Exchange under the AOL ticker symbol.
Telephone services company NEXTLINK Communications (Nasdaq: NXLK) and Internet services provider Concentric Network(Nasdaq: CNCX) have agreed to a merger worth $2.9 billion. Under terms of the deal, NEXTLINK will pay $45 in stock for each share of Concentric.
Direct sales PC maker Gateway(NYSE: GTW) has reached a deal to buy high-end Athlon microchips from Intel(Nasdaq: INTC) rival Advanced Micro Devices(NYSE: AMD) after a chip shortage led Gateway to miss estimates for its most recent quarter.
Food service distributor Sysco(NYSE: SYY) has reached agreement to buy privately held food service company FreshPoint Holdings for an undisclosed sum. FreshPoint, which has more than 20,000 restaurant and other food service customers nationwide, has annualized sales of $750 million.
