A Merger Reshaping The Future 

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A Merger Reshaping The Future 
AOL and Times Warner forge an alliance which shows the clout net companies enjoy worldwide. And forms a powerful new entity combining the print, television and internet business globally.

On January 10, internet major AOL and media and entertainment giant Time Warner announced a $160 billion merger. The deal gives AOL a majority stake in the new company with 55% holding while the balance will be held by Time Warner.

The deal once again highlighted the power of the high valuation given to net companies, compared to other companies. In terms of revenue, AOL with a revenue of about $4.7 billion for 1999 would dwarf Time Warner’s $14.5 billion. However in terms of profitability, AOL with $396 million was much ahead of Time Warner with $168 million.

AOL would gain access to the widespread broadband cable network and a subscriber base of about 13 million. Also coming into AOL’s portfolio would be established print, television and internet media brands–magazines like Fortune, Time and People; TV networks like CNN, TNT and cartoon network; and cable network, HBO. AOL now becomes the number two player in the broadband access network after AT&T in an area where its archrival Microsoft has shown considerable interest. 

AOL can now access the rich Time Warner content and distribute it via broadband. It could offer its service free to ward off the challenge from numerous ISPs and could charge a premium for the high speed access. On the other hand, Time Warner, would get to align with an internet savvy company and make the transition into the internet world.

Is it a win-win for both the companies? So far, the Wall Street pundits do not think so. AOL has seen its stock go down from $72 on January 10 to about $61 on January 18. It is doubtful that, with Time Warner’s slow growth rate, AOL can maintain its revenue and profitability growth. AOL is combining with a much slower-growing company that has a dramatically smaller price to earnings ratio. This will not only affect the future capital market valuations of the company but may also hit its ability to raise capital for any future deals. 

What is interesting is that about 18-24 months back, people were expecting media and entertainment companies to pick up net companies, but the scenario has changed dramatically since then and it is the net companies which are now in the driver’s seat. The market gives high valuations to internet companies and they have the market’s support for mergers and acquisitions. On the other hand, the slow growing media and entertainment companies need to snap up the faster growing net companies but cannot do so since they lack market support.

AOL has been in a more powerful position financially with a market cap of about $160 billion during the deal–thanks at least in part for AOL being a ‘dot com’–compared with Time Warner’s market cap of roughly $115 billion. Suffice to say, if the new AOL-Time Warner is termed as a media company, then it would stand to lose the financial clout and the ability to do more such deals in the future. 

The Indian outlook
So what does this mean in the Indian context. So far we have only seen Satyam Infoway gobbling up Indiaworld and its valuation go up further consequently. Will any deals similar to AOL-Time Warner happen in the country? India too is witnessing the high valuations being accorded to net companies by venture capitalists and the hype being built around such companies. However, mega deals of the scale of AOL- Time Warner will take some time to happen. K Ganesh, CEO, Bharti BT, thinks that it will take at least another three to five years for such a merger to take place in India.

“In India, both the ISPs and the net companies have just started off. As of now there is an organic growth taking place in these sectors. The case of AOL-Time Warner is to be seen in the light of AOL being in existence for the past 15-16 years and having a subscriber base that is more than that of the US postal department. So, you can clearly see that it will take some time for these things to happen here.” The same is the view held by KB
Chandrasekhar, Chairman and Co-Founder, Exodus, “When we look at the Indian context, not many laws are in place. The Indian mindset has to change, for there is a tendency to run forever.”

However, no one can dispute that it is a trend that will slowly catch up in the long run and will lead to the coming together of content and access. “There is a lot of relationship between content and access. However, from the Indian point of view the delivery mechanism has to come in place. I am slightly skeptical of how fast content and access can come together,” says Nanda
Menon, Head, Mergers and Acquisitions, Jardine Fleming. 

However what is happening in the Indian context is the emergence of private television channels that already have a strong content team in place and are interested in getting on to the net. For instance, Zee and Star have both announced their web initiatives. The move towards the net has already begun and it will not be long before there is a convergence of TV, print, the net, entertainment and telephony, according to Balu Nayar, VP, Marketing, ITSpace.Com. With internet users rising phenomenally and the TV channels having their infrastructure and subscriber base in place, the stakes in the Indian market is quite high for such a convergence to take place.

Indeed, the ramifications from the Indian viewpoint have yet to set in. The trend is towards the emergence of a new world where access and content will come together. So will it be media houses ZEE and Star picking up ISPs or the other way round? Whoever makes the first move will set the trend and change the dynamics of the Indian access and content market. 

Yograj Varma in New Delhi
with inputs from Rajesh Menon in Bangalore

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