Just What the Market Needed


The America Online acquisition of Time Warner last week caused a split opinion among high yield pros on the deal's impact in their market.

The two schools of thought boiled down to one of the following: this is a watershed moment and the next big move in a tidal wave of future mergers; or, investors don't like the deal since the stocks lost ground almost immediately.

In fact, buy-sider John Kornitzer of Kornitzer Capital, squarely in the second category, went as far as to say that he thought the merger would fall apart due to the market's apprehension.

And indeed, at press time on Thursday, AOL had lost almost 17% of its value in the stock market since the announcement, while Time Warner was down about 12% on the week as investors punished both companies.

Most high yield observers, however, said the deal underscored, in a big way, the importance of the Internet in delivering content. And the content can be almost anything, noted Deutsche Banc Alex. Brown analyst Gary Jacobi, from the front page of the New York Times to a blue, hooded sweatshirt from L.L. Bean.

And with a whole slew of magazines and a television network, Time Warner is one of the biggest content providers in the world, he said.

Dick Cryan, a portfolio manager and senior vice president at Evergreen Investment Management, said that the mammoth merger was just what the telecom and media sectors needed since the year has begun on a down note. In fact, some market participants had already started to doubt the validity of these issuers as takeover targets, he said, partly because the Nasdaq slipped from its December levels.

As far as the high yield names are concerned, it was generally thought to benefit any of the last-mile, connectivity names, especially the DSL providers like Covad or Rhythms.

Those so-called last mile names may seek to form joint ventures with AOL/Time Warner to route its massive content over high-speed networks to millions of customer homes.

Other names that may see the benefit are the wireless carriers, as they too seek to transfer content over their systems and provide their customers with wireless Internet access. The wireless phones could act as Internet portals for the users; a technology that exists now, but is not as widespread as it likely will be in the near future, an analyst said.