Time Warner Buy Has Some Analysts Climbing Off AOL Bandwagon

A day after America Online's (AOL) planned acquisition of Time Warner (TWX) heralded the dawn of media-Internet "convergence," several analysts broke ranks, questioning whether the deal would slow growth at the combined AOL Time Warner.

The deal, the largest in history by far, won vast praise Monday, sparking sharp rallies in the media, entertainment and Internet sectors (not the least of which was Time Warner's 39% jump). But not everyone was persuaded, as illustrated by the critical reports issued Tuesday by a number of brokerage houses.

The reports focus on whether AOL Time Warner stock can maintain AOL stock's go-go growth record, and whether trading in the shares is worthwhile in the months leading up to the deal's closing. The dealmakers' shares bore the brunt of the scrutiny Tuesday, as tech investors took profits in the wake of deal-invoked euphoria. AOL shares slid 12% to around 64, and Time Warner shares dropped 8% to 85.

Talk of a Slowdown

Some observers worried that AOL's highflying stock, which split twice last year, would be weighed down by the addition of Time Warner's slower-growth businesses. For instance, analysts at Warburg Dillon Read said in a report that AOL stock will be "dead money" in the near term as investors grapple with the likelihood that AOL Time Warner's revenue growth will be in the 15% range, half of AOL's standalone projections. (The firm rates AOL a strong buy, with a price target of 71. It has done no recent underwriting for AOL.)

Other brokerage houses factored in trading concerns as well as growth issues in issuing cautious comments on the deal. Analyst Arthur Newman from Schroder lowered his AOL rating to outperform from significantly outperform. After considering the prospect of a diminished growth rate and arbitrage speculation, the firm lowered its 12-month price target to 85 from 105, according to a research note. (Schroder hasn't underwritten any recent offerings for AOL.)

The Volatility Angle

Robertson Stephens senior Internet analyst Michael Graham said in a report Tuesday that the deal represents a departure from AOL's business model by adding Time Warner's tangible assets. "Thus we expect heightened volatility in the short term as AOL investors sort through the new business model, some Time Warner investors take their premium and go home, and others question the time frame for synergies to develop," he wrote. (He maintains a strong buy on AOL and doesn't rate Time Warner. Robertson Stephens hasn't underwritten for either company.)

Along those lines, Lauren Martin of Credit Suisse First Boston also lowered her rating on Time Warner, to hold from buy, after it blew through her price target of 90 on Monday. She said Time Warner is likely to trade in tandem with AOL now that the companies have agreed to a deal in which each Time Warner share is essentially swapped for an AOL share.

"Wherever AOL trades, that's where Time Warner trades," Martin said. (Her firm had done no underwriting for either company.)

>To order reprints of this article, click here: Reprints