AOL, Time Warner merge in $350 billion deal

America Online, the giant online services company, and media conglomerate Time Warner today announced they have agreed to merge in a blockbuster deal valued at about $350 billion.

The merged company will be called AOL Time Warner, and combines AOL's online services with Time Warner's vast media and cable assets. In a world where online services, media and entertainment are rapidly converging, the new company could have almost unparalleled resources.

"It is probably the most significant development in the Internet business world to date," said Phil Leigh, an analyst at Raymond James. "If it hasn't been evident to most of us yet, it should be obvious to us now that the Internet is about audio and video and not just merely text and graphics."

For Time Warner, the deal also represents a marked departure from previous attempts to become a Net player. The media giant first ventured online with its Pathfinder site, an all-in-one site that brought the company's magazines and news properties together. Time Warner abruptly dropped that strategy saying it planned instead to launch a series of "vertical hubs" that focus on topics such as news and personal finance. Its first niche hub was Entertaindom.

AOL, the clear leader of Internet service providers, has been positioning itself for the impending broadband explosion, cutting deals with satellite delivery firms and telecommunications companies for DSL services. However, AOL has focused mostly on locked cable access with AT&T and other cable companies controlling the pipes.

The companies said that, with respect to broadband access, AOL Time Warner will be committed to giving consumers a choice of ISPs and content, and they hope this merger will persuade all companies operating broadband platforms to also open up their pipes to competing ISPs.

Today's deal gives AOL access to Time Warner's broadband delivery systems and brings Time Warner brand names such as CNN, Warner Bros., Sports Illustrated and many others to AOL subscribers.

Steve Case, the chairman and chief executive officer of AOL, will become chairman of the board of the new company. Gerald Levin, Time Warner's chairman and chief executive officer, will become AOL Time Warner's CEO.

As chairman, Case will play an active role in helping to build and lead AOL Time Warner, focusing particularly on the technological developments and policy initiatives driving the global expansion of the interactive medium. As chief executive officer, Levin will set the company's strategy, working closely with Case, and will oversee the management of the company. Levin will report to the board, which will consist of 16 members, with eight appointed by each of the current America Online and Time Warner boards.

Time Warner president Richard Parsons and America Online president and chief operating officer Bob Pittman will be co-chief operating officers of AOL Time Warner.

"This strategic combination with AOL accelerates the digital transformation of Time Warner by giving our creative and content businesses the widest possible canvas," Levin said in a statement.

Under the terms of the definitive merger agreement approved by unanimous votes at meetings of each company's board of directors, Time Warner and America Online stock will be converted to AOL Time Warner stock, with Time Warner shareholders receiving 1.5 shares of AOL Time Warner stock for each share of Time Warner stock they own. America Online shareholders will receive one share of AOL Time Warner stock for each share of America Online stock they own.

AOL and Time Warner have market capitalizations of $164.9 billion and $83.3 billion, respectively.

The arrival of broadband access is likely to usher in more powerful Internet-based entertainment and gaming applications.

Analysts said that the Net landscape is likely to change rapidly over the course of the year as large capitalized Internet firms look to acquire media companies. Web portal Yahoo has a market cap of $107 billion--far greater than some leading media companies, including Disney which has a cap of $64.19 billion.

"About 18 months ago, the feeling was that some of the media companies would buy Internet companies, but what happened is that the valuations got so reversed that it is really the opposite that is likely," said Leigh. "With 55 percent of the new company's stock being controlled by AOL shareholders, I think AOL is in the driver's seat. Today's deal is psychologically a big step and now it is likely that we will see others come along."

The merger will be effected on a tax-free basis to shareholders. When complete, America Online's shareholders will own approximately 55 percent and Time Warner's shareholders will own approximately 45 percent of the new company.

The stock will be traded under the symbol "AOL" on the New York Stock Exchange.

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.

The transaction is subject to certain closing conditions, including regulatory approvals and the approval of America Online and Time Warner shareholders, and is expected to close by the end of the year.

Ted Turner, vice chairman of Time Warner, has agreed to vote his Time Warner shares, representing approximately 9 percent of the company's outstanding common stock, in favor of the merger. Turner will become vice chairman of AOL Time Warner.

With the completion of the merger, AOL Time Warner will be positioned to speed the development of interactive medium.

"We will accelerate the development of Time Warner's cable broadband assets by bringing AOL's hallmark ease-of-use to this platform," Pittman said in a statement. "We expect America Online to help drive the growth of cable broadband audiences, and we will use our combined infrastructure and cross-promotional strengths to enhance the growth and development of both America Online and Time Warner brands around the world."

America Online and Time Warner also announced new marketing, commerce, content and promotional agreements that will immediately expand various relationships already in place between the two companies.

Among several marketing agreements, CNN.com and Entertaindom.com programming will be featured prominently on various AOL services; AOL members will have access to a wide range of Time Warner promotional music clips from Time Warner's selection of popular artists; and Broadband CNN news content will be distributed on AOL Plus, the rich media content offering designed for AOL members connecting via broadband, when it launches this spring.