Deals & Deal Makers: The Deal, Week 2: Time Warner, Media Firms Look Like Winners
So one week after The Deal, who are the winners and losers?</br></br>If the stock market is any guide, one obvious winner in the announced megamerger of America Online Inc. and Time Warner Inc. is Time Warner itself, which obtained a stunning 70% merger premium to its then-prevailing stock price. The transaction was valued at about $160 billion when announced, but the decline in AOL's stock reduced the value to a current price of $138 billion.</br></br>In some respects, that was completely expected, and the one-day delay before AOL's decline -- now standing at about 18% -- was largely driven by the early euphoria over the deal. But what also took place was a massive transfer of value from AOL shareholders to Time Warner shareholders, so a decline in AOL was inevitable, points out one media investment banker. Time Warner's shares ended up 25% for the week, a very respectable showing.</br></br>Though it was precedent-setting in many respects, from a financial point of view the transaction was a typical late '90s deal: a fast-growing upstart with a high-multiple stock -- WorldCom Inc., Qwest Communications International Inc., Global Crossing Ltd. -- using its currency to buy a more-established company with hard assets. Thus, WorldCom acquired MCI Communications to form MCI WorldCom Inc. (and is now buying Sprint Corp.), Qwest is acquiring U S West Inc., and Global Crossing acquired Frontier Corp. Those deals all deflated the multiples of the buyers.</br></br>Then, later in the week Charles Schwab Corp., the online brokerage behemoth that has an Internet-like multiple compared with other financials, said it would pay $2.7 billion in stock to buy blue-blooded U.S. Trust Corp. The two seemingly dissimilar announcements underscored to Wall Street that the new and old worlds combining would likely be good news for the old-world stocks -- and for more mergers. Trust banks climbed on the news.