Microsoft has emerged as the front-runner in the talks surrounding the potential sale of a stake in America Online, two people involved in the negotiations have said. But despite a flurry of interest in AOL from Microsoft, Google and others, reaching a deal has been harder than Time Warner may have hoped.
Microsoft, which approached AOL several months ago to discuss joint ventures, aims to fold its MSN internet service into a venture with AOL, adding that any agreement would be several weeks away.
Behind the scenes, a number of questions remain that could hold up or even derail a potential transaction.
One is whether such an alliance would represent yet another new and unproven partnership for Time Warner, a company that has spent much of its energy in recent years trying to unwind complicated alliances and simplify its business.
Another is whether, five rocky years after the AOL-Time Warner merger, bringing in a new partner at AOL would help Time Warner’s wide-ranging media businesses navigating the digital world.
These issues suggest that Time Warner would be loathe doing anything unless it gives AOL a higher value in the eyes of investors and has clear advantages over moving ahead alone.
For the moment, Time Warner’s chairman and CEO Richard Parsons acknowledged the talks. However, he said the discussions are very fluid, and they do not know whether a deal will even be reached.
Microsoft and Time Warner could not be immediately reached for comment. Other suitors seeking a stake in AOL include Google, Comcast, Yahoo and News Corp, sources familiar with the situation said. Google and Comcast have valued AOL’s content business at $10bn, implying a valuation of as much as $5bn for a minority stake, the Wall Street Journal reported last month.
The stake sale would add a new chapter to the Time Warner-AOL saga.
AOL founder Steve Case recently announced that he had resigned from the board of Time Warner. The resignation capped a turbulent five years since he orchestrated the disastrous mega merger of the media and internet groups.
Mr. Case, who will remain one of Time Warner’s biggest individual shareholders, said he was ‘pleased to see a renewed focus on AOL at Time Warner’, and said he would ‘remain actively engaged as strategies for AOL’s future are considered.’
As co-founder of AOL, I continue to have a special pride and passion for AOL, and I strongly believe that AOL — once the leading internet company in the world — can return to its past greatness, he added.
Mr. Case engineered the takeover by AOL of Time Warner, leveraging AOL’s inflated stock value at the height of the dotcom boom to take control of the much larger media and entertainment group.
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At the very least, an investment could help place a higher value on AOL’s business than investors have been giving it credit for within Time Warner over all–something that might help it appease cranky investors, particularly Carl C. Icahn, who has built a 2.9 percent stake in Time Warner with three hedge funds and has sharply criticized its management and board for its stagnant stock performance.
Were Microsoft to prevail, it would do so with an investment and partnership that includes folding its MSN Internet service into a venture with AOL. But Google remains interested in a deal that may also involve Comcast, while Yahoo and News Corp. are in the wings.
While the AOL sweepstakes is predicated on newfangled concepts like developing new models for advertising and melding software applications with entertainment products, what is afoot is roughly the cyberspace equivalent of two of the Big Four broadcast television networks trying to merge to dominate prime time.
According to ComScore Media Metrix, Time Warner’s sites attracted 119 million users in September, with most viewing AOL and related Web sites. That made Time Warner the second-most-visited Internet destination in the United States, after Yahoo sites with 123 million.
MSN and other Microsoft sites attracted 114 million unique users, while Google attracted 87.6 million. An AOL-MSN deal would catapult the resulting venture into the No. 1 spot, and thus make it especially attractive to advertisers seeking broadest audiences.
Microsoft’s chairman, Bill Gates, said in a meeting with reporters and editors at The New York Times, that his interest in AOL was about playing a greater role in the future of advertising. A combination with AOL would potentially resuscitate the languishing MSN Internet portal and find broader distribution for its new Internet search service.
While discussions with Microsoft percolate, that leaves the door open for Google. The Internet search leader has discussed a partnership that may not involve cash trading hands but would give AOL more involvement in the advertising relationship, according to one person involved who declined to be identified because of the continuing discussions.
Richard Greenfield, a media analyst for Fulcrum Global partners, last week called Microsoft the most likely partner for AOL and predicted a deal valuing AOL at $15 billion to $20 billion, significantly more than he estimates it now represents in Time Warner’s $81 billion market capitalization.
Aligning with MSN would also bolster AOL’s Web presence abroad, in markets like Japan and Canada, where MSN has a much stronger market position than AOL. A chief sticking point in a potential Microsoft deal is how it would be governed, and thus far Time Warner has taken the position that, barring a very rich offer, it will not cede control.
The merger was trumpeted as the ultimate alliance between the new and old economies a deal that would place Time Warner at the cutting edge of the digital future.