Euro high-tech business reacts to AOL-Time Warner deal

Industry analysts said that Time Warner's landmark merger with America Online will send shock waves through the European Internet business, possibly inspiring similar deals and raising the stakes for service and content providers. (See: AOL and Time Warner to merge)

Europe's media sector shot up nine percent on word of the merger. Shares in UK media groups Granada Group and Pearson (quote: PSON) shot up on the merger news, climbing 12.4 percent and 17.5 percent respectively.

The STOXX media sector index was up 8.9 percent.

The deal, which is expected to close by the end of 2000, will create a company with $40bn (£24.8bn) in revenue in its first year of operation and encompass properties ranging from ICQ to the WB television network.

The AOL-Time Warner deal is likely to have broad ramifications in the Internet sector. AOL and Time Warner will be the largest marriage of an Internet darling and a traditional media company.

"Their aim is to be in the commanding front row position worldwide in terms of new media and old media," said Ken Fraser, research director with IDC. "They can now exploit advanced infrastructure, at the same time using the tech smarts that AOL, the Sun/Netscape alliance and that whole collection of companies [owned by AOL] can bring."

Analysts said the impact in Europe will most probably be felt in the ISP sector, with mergers between service providers and content providers likely to be a theme in the next few months.

The deal is a "wake up call for Internet access providers all over the world," said research firm WestLB Panmure in a strategy note. "This suggests that those left out of the consolidation process could be left looking a bit sad."

Copycat deals could be on the way in Europe, with some traders speculating on a Pearson (quote: PSON) tie-up with Freeserve (quote: FRE).

At the same time, some wondered what the deal would mean for AOL Europe, which is a joint venture between America Online and Germany's Bertelsmann. "Bertelsmann is really on the edge of competition with Time Warner," said analyst Fraser. "They are aggressively broad in media... they're definitely in the portal business."

Bertelsmann responded that it sees its partnership with AOL Time Warner unchanged following the merger, saying new media startups are its real concern. "Our competitors are the e-commerce [startups] like Amazon, or companies like Microsoft who want to get into the online world, or like Yahoo!, who are strong brands on the Internet," said a Bertelsmann spokesman.

Under the terms of the merger, Time Warner shareholders will receive 1.5 shares of AOL Time Warner for each share of Time Warner stock they own. America Online shareholders will receive one share of AOL Time Warner stock for each share of America Online stock they own.

With the deal, AOL gains access to Time Warner's significant cable assets. AOL, which already has digital subscriber line (DSL) access and a satellite deal with GM's Hughes Electronics, was missing the cable pipes.

Time Warner cable has access to 20 million homes in the US and gives AOL the last piece of its broadband strategy.

ZDII's Larry Barrett contributed to this report.

For full coverage, see the AOL-Time Warner News Roundup.

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