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Dec. 7, 2009, 3:33 p.m. EST

AOL awaits its next great adventure

Internet also-ran re-emerges, weighed down by decade of decline

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By John Letzing, MarketWatch

SAN FRANCISCO (MarketWatch) -- Ten years ago, at the height of the dot-com boom, America Online Inc. and Time Warner Inc. cobbled together an audacious merger of two of the world's foremost information giants, one old and one young.

But what was billed as a new-media monolith that could lead the dawn of the digital age rapidly proved to be standing on an extremely shaky foundation.

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AOL Spinning Out

Nearly a decade ago, AOL and Time Warner announced their megamerger. Now the spun-off AOL, which will trade on the New York Stock Exchange this week, faces stark challenges from the likes of Google. John Letzing reports.

When AOL and Time Warner stunned the business world with their historic $160 billion megadeal in early 2000, few were even aware that a 70-person startup called Google had set out to show small advertisements alongside Internet search results.

Just five years later, Google Inc. /zigman2/quotes/205453964/composite GOOG +0.14% itself had become a heavyweight on the scene and it purchased a 5% stake in AOL from Time Warner, at a price of $1 billion. Four years after that, however, Google sold the stake back to a chastened Time Warner for $283 million, while maintaining control of the inner workings of AOL's search engine through a partnership.

So it has gone for AOL, which is poised to re-emerge as an independent entity later this week, albeit in an online world that has passed it by.

AOL's current, implied market capitalization is $2.6 billion -- its shares have been traded since Nov. 24 on a conditional, "when-issued" basis, and hovered around $24 on Friday. The spinoff becomes official on Wednesday and the shares will start changing hands on the New York Stock Exchange the next day.

Google's market cap, in contrast, is now roughly $185 billion. The Mountain View, Calif.-based company has roughly 20,000 employees, while AOL is in the process of shedding roughly one-third of its head count, or 2,500 workers.

Steve Case, left, chairman of America Online, with Gerald Levin, chairman of Time Warner for the January 2000 unveiling of their merger.
Reuters
Steve Case, left, chairman of America Online, with Gerald Levin, chairman of Time Warner for the January 2000 unveiling of their merger.

The logic behind AOL's merger with Time Warner appeared to make sense at the time.

Both sides in the partnership envisioned an AOL brimming with a trove of new content from CNN, film studios, Warner Music Group artists such as Eric Clapton and more. "We've transformed the landscape of media and the Internet," then-AOL Chief Executive Steve Case said at the time.

In fact, the companies were "both sitting on doomed business models," according to James McQuivey, a Forrester Research analyst.

AOL, for its part, was primarily a provider of dial-up Internet access, with a portal highly dependent on its subscribers. Time Warner was relying on endangered media properties such as magazines. Combining the two parts could do little to stave off the inevitable.

What ended up being "transformed," to use Case's dream term, was AOL -- from a new-media superpower into an Internet also-ran. "It was the marriage of two giants, both crippled by a devastating illness," McQuivey said.

AOL, then a Dulles, Va.-based company that earned notoriety for breaking into the blue-chip S&P 500 Index in the 1990s, ahead of Silicon Valley-based rival Yahoo Inc. , today is a mere mortal in the corporate world. It is soon to replace Imation Corp. , a media-storage firm, on the MidCap 400 Index.

Only now are large media companies beginning to fully embrace the Internet, capturing the opportunities that AOL Time Warner was once expected to dominate.

Hulu, the popular online-video service is a joint venture owned by News Corp. /zigman2/quotes/204787942/composite NWS -0.94% , Walt Disney Co. /zigman2/quotes/203410047/composite DIS -1.58% and NBC. Its segments of the media giants' TV shows and films likely would have been unthinkable back when AOL merged with Time Warner.

/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,771.43
+2.55 +0.14%
Volume: 1.05M
Nov. 25, 2020 4:00p
P/E Ratio
35.37
Dividend Yield
N/A
Market Cap
$1195.71 billion
Rev. per Employee
$1.36M
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/zigman2/quotes/204787942/composite
US : U.S.: Nasdaq
$ 18.01
-0.17 -0.94%
Volume: 395,932
Nov. 25, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
1.11%
Market Cap
$10.63 billion
Rev. per Employee
$383,319
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/zigman2/quotes/203410047/composite
US : U.S.: NYSE
$ 149.09
-2.40 -1.58%
Volume: 9.55M
Nov. 25, 2020 7:00p
P/E Ratio
N/A
Dividend Yield
0.00%
Market Cap
$265.53 billion
Rev. per Employee
$320,813
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