Welcome! Why You've Now Got AOL Time Warner

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Necessity mothered the merger of AOL and Time Warner. TIME.com's new $350 billion parent company — AOL Time Warner — was unveiled Monday after the giants of the Internet and of traditional media negotiated the biggest merger in history. Each side had something the other badly needed: Time Warner recognizes that the future of an infotainment company is digital, but its attempts to stake its own claim on Internet real estate — a competitive CNN news site, an innovative Warner Brothers product and the failed Time Warner "Pathfinder" network — were unable to create the dominant presence the corporation enjoys in other media. AOL's 20 million-and-growing e-mail nation (which is reported to have spent $2.5 billion online during the holiday season) provides an unmatched Internet audience for Time Warner's content. "This is a natural progression from TIME's mergers with Warner and with CNN," says TIME business editor Bill Saporito. "As media evolves, you have to play this game in order to be a growth company."

For AOL, the dowry is not only Time Warner's news-and-entertainment empire, but also its cable television infrastructure, which will prove invaluable if the Virginia-based juggernaut is to dominate the next, broadband phase of Internet development as comprehensively as it has ruled the current era. "Time Warner's cable distribution system is unmatched," says Saporito. "And now those fat pipes are going to be pumping AOL, too."

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though the two corporations' executives stressed the compatibility of their corporate cultures, the match may be discussed for years to come in MBA programs. "This merger has created a really big company," says Saporito, "and the history of big mergers in other industries is that they really don't work very well. So the success of this one is far from guaranteed." The two sides also had to do some bargaining on valuation. In the end, the deal was this: Time Warner shareholders will be given 1.5 shares in the new entity, while AOL's will get a one-for-one swap. That gives AOL stockholders 55 percent of the new company, which will be headed up by Time Warner CEO Gerald Levin, and gives Time Warner equity a shot in the arm. After all, before the merger AOL's market capitalization had been $163.4 billion, nearly double Time Warner's $83.3 billion. Levin acknowledged there had been some tough bargaining on valuation, given, as he delicately put it, "the way the market's behaving right now." And given — as AOL CEO Steve Case acknowledged, despite his company's superior stake in the market — that AOL would contribute only 20 percent of the new company's earnings in its first year. "AOL is something of a rarity in that it's an Internet company that actually makes a lot of money," says Saporito. "But Time Warner's approach is based on looking to the future, and the value that will be created by combining its assets with those of the most powerful company in the Internet space."

And the future? Assuming it survives any regulatory challenges, the move will inevitably set off a rash of media-Internet marriages as competitors of both AOL and Time Warner reposition themselves to challenge the new corporation. Wall Street certainly thinks so; even as Time Warner stock spent the early trading going up, up, up (at one point reaching 102 before settling in at around 90-plus), stocks for a number of Internet and media companies, such as Lycos and Disney, also shot up on the news. As the process unfolds, the merger of news and entertainment of the past decade will now be extended to Internet and software companies, as Internet real estate is parceled out among infotainment juggernauts. After all, Time-Life wedded with Warner Brothers and Time-Warner consumed CNN while AOL nabbed Netscape. And now they have each other.