Managers cheer AOL-Time deal

Financial advisers and fund managers are decidedly bullish about the announced $160 billion merger of America Online Inc. and Time Warner Inc., even though Wall Street brought down the price from its heady opening.

While some AOL stockholders were unenthusiastic about acquiring slower-growing Time Warner, others found that the merger gives credibility to AOL’s high stock price.

“We’ve always looked at stocks on the basis of their fundamentals, and it’s been too difficult to justify the valuation of AOL, given its present earnings outlook — until now,” says financial adviser Greg Conway of Conway Jarvis & Associates in Seattle.

“AOL’s valuation can be far greater supported by the type of infrastructure that Time Warner controls,” agrees Gary Vawter, an adviser at Vawter Financial in Columbus, Ohio, whose clients own stock in both companies.

Of course, it helps that AOL’s valuation was whittled down somewhat over the course of last week. The stock closed Jan. 7, before the deal was announced, at $73.75, and ended last week at $63.25. Time Warner, which closed Jan. 7 at $64.75, rose as high as $102 after the deal was announced, before ending the week at $83.25, still up 28.6%.

Norm Grant, who heads his own advisory firm in Minneapolis, got calls from clients viewing the AOL dip as a buying opportunity.

It’s a mammoth beast, to say the least. Pending federal approval, the conglomerate will have a market capitalization of roughly $350 billion. It would include such high-profile properties as Time, Fortune and Money magazines, cable networks CNN, TNT and HBO, and cable TV systems with 13 million customers. All may ultimately be tied to the websites, e-mail services and chat rooms that have propelled AOL to the top position on the Internet, with 22 million subscribers.

Marc Greenberg, manager of the $600 million Invesco Leisure Fund in Denver, calls the merger “a watershed event.” With Time Warner stock making up 2.4% of his fund, Mr. Greenberg says he’s most excited about the merger because of what he views as a good fit managerially.

Why? Time Warner chief executive Gerald Levin — soon-to-be CEO of the combined company — is approaching retirement age, says Mr. Greenberg, so he poses little threat to the fortysomething AOL executives — chairman and CEO Steve Case and president Bob Pittman.

Portfolio manager David Brady, whose $1.3 billion Stein Roe Young Investor Fund has a 2.4% stake in AOL, is equally enthusiastic about how management has been organized. Still, he asks, what’s it all worth?

It’s a question Craig Limoges of Limoges Investment Management in Vancouver, Wash., was fielding last week. In the Time Warner camp, “you’re talking about a different level of expectation,” he observes.

Mr. Vawter, who says that many of his AOL-owning clients are equally concerned that the merger may dampen AOL’s growth, is advising his clients to sit things out for a couple of weeks, to see if market sentiment changes.

So is Jim Bruyette, an adviser with Sullivan Bruyette Speros & Blayney in McLean, Va.

Mr. Bruyette wonders whether AOL as a media company is going to grow anywhere as fast as it would have as an Internet company. “The market is clearly saying no at the moment.”

Indeed, concerns abound not only about Time Warner’s comparatively slow year-to-year growth but also over its largely unsuccessful efforts at establishing a strong Internet foothold, which critics fear may keep AOL back.

Fears also have arisen over the increasing pressure AOL is facing from Internet service providers willing to give away subscriptions. NetZero Inc. and CMGI Inc.’s AltaVista have already rolled out free Internet service, for example.

Like fellow managers Mr. Greenberg and Mr. Brady, John Ballen of the $15 billion MFS Emerging Growth Fund remains unfazed by AOL’s stock slide. In fact, he suggests that even the most aggressive AOL investors of old should be thankful the two companies are joining.

“AOL may have been growing at 50% annually, but you can’t do that for long,” says Mr. Ballen, whose fund has dedicated 1.5% of its holdings to Time Warner.

“I’d rather see the combined company growing at a rate of 20% to 25% for a longer period of time, and I believe it will.”