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FCC Clears AOL's Time Warner Buy, Removing Last Hurdle to Megadeal

Updated from 7:28 p.m. EST:

The government Thursday cleared the last hurdle in the path of America Online's (AOL) merger with Time Warner (TWX - Get Report), just over a year after the media megadeal was proposed.

The Federal Communications Commission's approval of the deal paves the way for AOL, the nation's largest online firm, to formally acquire Time Warner, the nation's biggest media and entertainment company, creating a multimedia colossus. The FCC approval requires the companies meet three conditions. AOL and Time Warner have already made concessions to a number of regulatory agencies as the deal, which lost some 40% of its value during the stock-market plunge of the last year, wended its way through European and U.S. government channels.

The merger was approved by all five FCC commissioners, though only three of them voted for the imposition of the new conditions. "AOL and Time Warner, you've got approval," commented commissioner Susan Ness, one of the majority.

Closing Time
Time Warner, AOL moving in lockstep

On Thursday, AOL jumped $2.34, or 5.2%, to $47.23, and Time Warner added $4.19, or 6.3%, to $71.19.

To win governmental approval of their pact, AOL and Time Warner have agreed to certain conditions that regulators hope will preserve a competition in various markets in which they operate. Under pressure from European regulators, for instance, Time Warner abandoned plans to merge with the record label EMI. In order to secure Federal Trade Commission approval, the companies agreed to take various measures to give unaffiliated Internet service providers access to high-speed Internet connections over Time Warner's cable systems.

The FCC imposed, as a condition of the merger, additional requirements in three areas: high-speed Internet services delivered over cable, instant messaging and Time Warner's ownership link with AT&T (T).

The FCC's Conditions

In the wake of the FTC's requirement that AOL Time Warner ensure that unaffiliated Internet service providers have access to the company's high-speed infrastructure, the FCC added a few more measures designed to "plug the holes" in the FTC agreement, in the words of FCC Chairman William Kennard.

AOL Time Warner won't be able to force subscribers to independent ISPs to go through a "first screen" of an ISP affiliated with AOL Time Warner (a display similar to the Microsoft (MSFT) Windows display that comes on each time computer users turn on their computer). Independent ISPs are guaranteed an independent billing relationship with their customers, so they don't have to bill them through AOL Time Warner. Independent ISPs are guaranteed the same technical performance as affiliated ISPs, and the FCC has the authority to review contracts between AOL Time Warner and independents.

In the area of instant messaging -- a business that doesn't amount to much financially now but is expected to have tremendous economic potential -- the FCC's conditions don't really go into effect until the services go beyond the text-based versions that are prevalent today. As soon as AOL Time Warner introduces advanced IM services, characterized by features such as streaming media, the company will have to either demonstrate that there is an industrywide standard enabling IM services from different companies to work with one another, or it must enter into contracts for compatibility with competitive services -- one rival service as soon as AOL Time Warner's turns on, and at least two more within the next sixth months.

The other IM condition is predicated on the expectation that IM services will eventually be used for people to communicate with one another over a variety of devices -- including computers, cell phones and other wireless gadgets -- and track them down no matter which device they're using. AOL Time Warner must make its "names and presence" database -- the equivalent of a multimedia telephone directory -- compatible with other companies', Kennard said.

Finally, Kennard said, the FCC is reiterating its position that AT&T must dispose of its stake in Time Warner's Time Warner Entertainment.

Big Deal

The deal values Time Warner at nearly $100 billion, making the AOL Time Warner deal one of the biggest U.S. mergers ever, as ranked by the value of the target company. Thomson Financial Securities Data valued Pfizer's (PFE) acquisition of Warner-Lambert last year at $90 billion, and the 1999 creation of ExxonMobil (XOM) at $86 billion. AOL's stock has suffered along with the rest of the Internet sector over the past year; on the eve of the merger announcement a year ago, AOL's stock was trading at $73.75, putting the value of the deal initially at more than $140 billion.

The resulting company, to be known as AOL Time Warner, expects to report $40 billion in revenue for the 2001 calendar year and $11 billion in earnings before interest, taxes, depreciation and amortization -- up 30% from 2000, on a pro forma basis. The empire will continue its predecessors' dominance in music, movies, television and the Internet. It will also be an experiment, on perhaps the grandest scale possible, of the opportunities created by merging old media and new.

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