Neowin.net - AOL-Microsoft? Not Likely, Just Logical

AOL-Microsoft? Not Likely, Just Logical

Posted by Arnaudt on 30 January 2003 - 21:37 · 11 comments & 1443 views

If Bill Gates bought the online albatross, he'd acquire the subscribers to make MSN a winner. And Time Warner? Its stock would soar

Even before the dot-com bubble burst, the Internet service provider (ISP) business had turned into a dogfight. Microsoft's MSN service, with as many as 9 million customers, has relentlessly chipped away at worldwide leader America Online. Still, with 35 million subscribers, the AOL service has held onto a commanding lead.

AOL is the only ISP to ever make significant profits, and it would seem to be in an impregnable position -- except for some serious problems. Its operating earnings have been dwindling by the month, and, in 2002 they fell 38%, to $1.8 billion, as revenues shrank 5.5%, to $8.6 billion, from the year before. The culprit: precipitously slowing subscriber growth due to a tardy rollout of broadband.

That has punished the earnings and stock price of parent company AOL Time Warner (AOL ), which on Jan. 29 reported a $33.5 billion writedown of goodwill in the Internet service, reflecting its decline in value since AOL merged with Time Warner two years ago. Worse, in the view of many analysts, America Online is accountable for some $8 billion to $9 billion of AOL Time Warner's $27 billion in debt -- which the parent company is hastily trying to reduce by putting various properties on the block.

News source: BW Online

EGOS AND FEUDS. Stop for a moment to consider AOL's multiple problems and Microsoft's manifest strengths, and a logical -- if somewhat farfetched -- solution emerges: Perhaps the two bitterest enemies on the Web should call a truce long enough for AOL Time Warner to unload its stumbling online service on voracious, cash-rich Microsoft.

O.K., so it's a fantasy -- given Microsoft's past antitrust problems -- with about as much chance of happening as, say, Steve Jobs getting hired as Bill Gates's replacement. Neither Microsoft (MSFT ) nor AOL Time Warner would even dignify such speculation beyond laughing it off. But just for a moment, set aside all the obvious reasons why such a deal could never happen -- and examine why it would make sense. "I think it's a brilliant idea," says Porter Bibb, former publisher of Rolling Stone magazine and founder of Technology Partners Holdings, a private technology-investment firm in New York.

For one thing, ego won't be a complicating factor for much longer. Effective with the impending departure of AOL Time Warner Chairman Steve Case, the last of the America Online execs who crossed swords with Gates over the years -- some of whom even testified against Microsoft's boss at the antitrust trial -- will be gone. Time Warner execs are running the show now, and they might forget about feuds and focus on pragmatism.

RAISING MONEY. If they did, it would become apparent that "a merger would solve problems for both America Online and Microsoft," argues Bibb. A sale of the Internet unit would suit several camps within Time Warner and the investment community just fine. By many measures, the $158 billion merger -- the biggest in corporate history -- has been a spectacular failure. Since the deal closed, AOL Time Warner has written off $99.5 billion in goodwill, including the latest charge, and is within a whisker of violating its loan covenants. Plus, AOL Time Warner is in dire need of cash -- and Microsoft has $40 billion of that. By selling the online service, AOL Time Warner could pay down billions in debt and bolster its credit rating, which has fallen dangerously close to junk levels.

AOL Time Warner is already thinking along these lines. It's expected to spin off a portion of its Time Warner Cable unit later this year in a public offering that could generate several billion dollars. And on Jan. 29, it reported the sale of its 8.4% stake in satellite maker Hughes Electronics to Bank of America (BAC ) for an estimated $800 million. AOL Time Warner also wants to sell its book-publishing unit, which analysts think could fetch $400 million. Selling America Online for, say, $9 billion, would let AOL Time Warner repair its balance sheet overnight.

Cash isn't the only reason such a deal would make sense. It would mollify not only Time Warner employees, many of whom have loads of worthless options but also its original stockholders, who have seen their shares lose more than 70% of their market value since the merger. A sale almost certainly would boost AOL Time Warner's moribund stock, since its traditional businesses have performed well during the economic downturn. Selling America Online to Microsoft would let AOL Time Warner salvage something from what critics have labeled the biggest merger mistake in history.

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#1 Posted by Chicane-UK on 30 Jan 2003 - 22:29: A great idea in theory, but would fail undoubtably for one single reason.. monopoly! The people who decide whether companies can and cannot merge would have a heart attack if this was even suggested.. just think about it.. it would be one of the biggest companies in the world without doubt. AOL/Timewarner/CNN/Microsoft - ouch! Waaaay too big. I'll be highly surprised if it ever comes to pass.

#2 Posted by badall on 30 Jan 2003 - 23:15: microsoft buying aol that is just not funny and ye the any monopoly comission will tell them no way in hell

(1 reply) #3 Posted by mawst on 31 Jan 2003 - 00:35: True, this would never come to pass. It wouldn't be allowed. On the other hand, I would like to see AOL obsorbed by something... anything. Furthermore it would keep AOL off of Linux, at least one would think. Which is something we (Linux users) want to never enter our world.

(4 replies) #4 Posted by cidbit on 31 Jan 2003 - 02:50: Not only that....that means netscape would be gone too, and winamp.....

#5 Posted by kxgard3 on 31 Jan 2003 - 04:51: How would it be monopoly? will still have Netzero, Juno, and hundereds of Local and reginal ISP'S. ALSO, MSN and AOL don't have there own servers or backbones they rent.

#6 Posted by mintll on 31 Jan 2003 - 09:51: MS owning Netscape NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!

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