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AOL, Time Warner shares down on merger pessimism

Wall Street 'wisdom' seems penny wise and pound foolish

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Investors left shares of AOL and Time Warner down sharply at the end of Tuesday's trading, amid suspicions that the high-tech superstar's phenomenal growth will be brought down to something approaching realistic rates as a result of the proposed merger. Thus AOL shares fell by 11 per cent in heavy traffic yesterday, dropping $8.25 per share to $64.37 at the close of trading, while Time Warner fell $6.12 per share to close at $86.12.

The Register thinks Wall Street is being very foolish if investors fail to recognise the extraordinary potential for each company to profit mightily from what the other brings to the table. For Time Warner, the benefits are immediate access to consumers' desktops, giving it a marketing and distribution mechanism it has lacked and which can place it on equal footing with big media rivals such as Disney and CBS.

For AOL the benefits are even greater. Paramount among them is access to enormous revenues and cash-flow potential, followed by Time Warner's vast library of very desirable content, the inheritance of a broadband cable infrastructure, and mature relationships with big advertisers. What Wall Street appears to view as the merger's cost is perhaps more of a strength.

The alliance, should it succeed, will place AOL in a new category of growth -- not the fragile, hyper-inflated, share-values-ahead-of-profits madness that has thus far characterised the dotcom investment craze, but something like organic, natural growth in harmony with real assets, real revenues, and, most improbable of all for an Internet business entity, real profits.

We also see a real potential for the merger to enable AOL to grow impressively in European markets, where it has to date been a relatively disappointing competitor. The revenue flow which Time Warner can provide will enable growth, while its entertainment content will draw subscribers. With that, AOL will at last be able to offer Europeans something worth paying for.

Indeed, we are at a loss to explain Wall Street's scepticism in any positive light whatsoever, unless it should indicate some brilliant, diabolical plot to drive the share prices down in anticipation of a future buying spree. We reckon such evil ingenuity as that to be beyond even Wall Street's repertoire, but we are prepared to applaud it heartily should it turn out to be the case. ®

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