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Speculation continues to swirl that AOL Time Warner (AOL
), the nation's second-largest cable company, might want to make a counterbid to Comcast's $58 billion offer for AT&T Broadband, the largest U.S. cable operator.
AOL Time Warner isn't talking. But no matter what happens, AOL is in the enviable position of having a buffet of smaller deals before it -- ones that might make just as much sense to the Internet and entertainment giant as acquiring AT&T Broadband.
Nearly everyone on Wall Street has a theory about what will happen on the AT&T front. AOL could trump Comcast's July 8 bid, which AT&T has characterized as too low, or Disney could form a consortium to buy AT&T Broadband -- a move that might finally give Michael Eisner & Co. a huge stake in the cable industry. (See BW Online, 7/13/01, "At the Mouse House, A Nervous Big Cheese") Heck, even Microsoft, which is set to launch the Windows XP operating system in three months, is said to be interested in a cable acquisition. Never to be ignored, Microsoft also happens to sitting on $30 billion in cash.
AOL Time Warner may or may not make a bid. But don't forget that this company is known for growth through acquisitions. From the smaller Moviefone and Mapquest deals to the market-moving Netscape and Time Warner mergers, AOL has spent the past few years constantly on the prowl. "AOL is always a couple of steps ahead when it comes to mergers and acquisitions," says Tim Miller, president of WebMergers.com in San Francisco. "Some of AOL's moves have been quite anticipatory of the next wave in technology."
HOT PROSPECTS. With its stock up nearly 40% for the year (it closed at $49.45 on July 17), AOL has fairly strong currency with which to embark on another shopping spree. Smart acquisitions could add to AOL's ability to drive subscriber growth -- exactly what it needs as it faces off against Microsoft in the high-stakes battle for the Internet consumer.
AOL reported disappointing results on July 18, but that isn't likely to stand in the way of acquisitions. AOL Time Warner saw its shares fall nearly 10%, to $44.70, early after reporting a net loss of $734 million in the second quarter and slowing revenue growth. The loss of 17 cents a share was less than the
loss of $927 million, or 22 cents a share, reported a year ago. But investors frown on the revenue growth rate. It climbed only 3%, to $9.2 billion, from $8.91 billion in the year-earlier period. AOL has been cutting costs across all divisions since completing its acquisition of Time Warner in January. Earnings before before taxes, interest, depreciation, and other charges increased 20 percent to $2.54 billion.
Which companies might AOL buy? There are three logical targets.
One is TiVo (TIVO
), the leader in personal video-recording technology and a company in which AOL already owns a 13% stake. Another is RealNetworks (RNWK
), a company integral to AOL's audio and video capabilities. And there's Cablevision (CVC
), the nation's seventh-largest cable operator with valuable assets that would fit nicely into Time Warner's New York-based kingdom. None of these companies, including AOL, would comment on the topic of acquisitions. But it's fair to say that AT&T Broadband may not be the only company on AOL's radar screen.
A good case could be made for picking up Cablevision. Its stock closed at $58.82 on July 17, down sharply from January's high of $91. During a February conference call with investors, AOL Time Warner CEO Gerald Levin mentioned that he might want to do a deal with Cablevision because its cable operations would fit so nicely with AOL Time Warner's own -- especially in New York. Cablevision owns the New York Knicks and Rangers, Madison Square Garden, a chain of movie theaters, and Radio City Music Hall. "Cablevision would complete the New York presence for AOL Time Warner," says a media analyst at a major investment bank.
More importantly, Cablevision would bolster AOL Time Warner's market share in cable and broadband. With more than 13 million subscribers, AOL Time Warner is the nation's second-largest cable company. If it turns out that third-ranked Comcast buys the nation's largest cable operator, AT&T Broadband, Time Warner would be under pressure to increase its market share, too. Says Jeff Bernstein, senior portfolio manager for the Pilgrim Funds: "From content to connectivity, Cablevision would offer a lot of bang for the buck for AOL Time Warner."
PATENT ADVANTAGES. Next, consider TiVo, a company that could give AOL a head start over Microsoft in offering interactive TV services. TiVo's digital video recording -- the ability to capture television shows without videotape, so you can watch what you want, when you want -- would seem to fit nicely into AOL's longer-term goal of becoming the leader in interactive television.
With its stock off 65% from a one-year mark of $29.90, TiVo shareholders might welcome a deal. The sharp fall in TiVo's shares can be attributed to the general malaise reverberating through the tech sector. And TiVo doesn't expect to be cash-flow positive until 2003 or later. But its digital video-recording patents make it the leader in the emerging field. Said TiVo CEO Mike Ramsey in a July 16 statement: "We expect new-subscriber additions in fiscal year 2003 to be approximately 300,000 and expect to end fiscal year 2003 with over 650,000 total subscribers." AOL loves subscribers. It already has around 30 million of them.
Forrester Research analyst Josh Bernoff published a report in May detailing why AOL, the largest outside shareholder, should buy the rest of TiVo. "AOL Time Warner needs a strategy for on-demand TV," Bernoff says. "With TiVo, AOL would get the top brand name for on-demand television and a service that many operators are already considering. AOL could also benefit from TiVo's engineering team, which created a far more TV-like interface than AOL TV." In fact, AOL signed a deal July 17 to make a joint TiVo/AOL TV set-top box in the fall.
THE REAL McCOY? TiVo acknowledges that it's looking for additional sources of funding and says it would be willing to sell stock for cash. Says Bernoff: "AOL's current stake effectively gives it right of first refusal on any acquisition."
Then there's RealNetworks. AOL has important partnerships with RealNetworks to deliver streaming audio and video applications over AOL's proprietary Internet service provider. And RealNetwork's technology competes head-to-head with Microsoft's streaming audio and video software. With music downloads and movie clips now a popular feature on any Internet service, AOL might want to snap up RealNetworks while its stock is down. Real closed at $10.78 on July 17, a sharp contrast to the high of $59.50 it reached before 2000's tech-stock crash.
The partnerships don't end there. AOL has a 20% ownership stake in MusicNet, too. Real holds 40% of MusicNet, a consortium-owned service that aims to be the Internet's premier online music service -- similar to Napster, but not free. "We have ongoing talks with AOL on a whole host of other issues, as well," says David Brotherton, spokesman for RealNetworks. "We think we have a deep and long-term relationship together."
THREE GOOD REASONS. While most analysts agree these companies are logical takeover targets, not all believe such deals are likely to happen. John Corcoran, analyst for CIBC World Markets, says AOL already has strong partnerships with Real and TiVo. "It doesn't need to acquire them outright," Corcoran notes.
As AOL does battle with Microsoft for the leading spot on the Internet, TiVo, RealNetworks, and Cablevision would each amplify AOL's ability to deliver innovative Web content. That's what drives subscription growth -- the most important asset in AOL's battle with Microsoft. Just ask Bob Pittman, AOL Time Warner's co-chief operating officer, who said in a July 11 interview on AOL's corporate Web site: "We worship consumers here. The real value of this company is built around consumer relationships." Consumers and technology are exactly why any one of this trio of potential takeover targets would make sense for AOL.
Shook covers financial markets for BW Online in New York Edited by Beth Belton
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Copyright 2001, Bloomberg L.P.
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