By Paul Larson (TMF Parlay)

( February 2, 2000 ) -- Does the Time Warner acquisition raise the floor on AOL? Sure it does, like thick mud right up to the company's knees. AOL will go from being a lean and powerful competitor to a bloated company that will have an extremely difficult time moving its feet and growing. It'll also be significantly less attractive to advertising and content partners, which is an important point to consider.

Most people bullish on this merger, Bill included, tend to look at all the assets Time Warner is bringing to the table and go, "Wow!" Nevertheless, keep in mind that all these assets will be spread over a mind-boggling 4 billion shares. With a prospective market capitalization approaching $300 billion, there had better be some assets there!

Does this merger really put AOL in a better position to fend off the threats of broadband and free ISPs? I think it's a wash at best. AOL already has a multibillion-dollar deal with Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %> to develop satellite Internet access, and this service will be in direct competition with Time Warner's cable Internet access. Same goes for many of the DSL companies AOL has been working with. In addition, I think other cable companies that compete with Time Warner may be a bit more reluctant to deal with AOL after the merger.

I will agree with Bill that AOL really does not have all that much content of its own as it stands today, and Time Warner will boost its offerings in this department immensely. However, where AOL excels is in presenting and distributing the content of other companies, yet this deal will certainly limit the amount of content coming from outside Time Warner. One of the reasons I believe Yahoo! has been able to flourish is because they've taken a neutral stance on content and can partner with just about anyone. AOL will not have this luxury after this merger is completed.

A partnership or alliance with Time Warner would have been received much better by Wall Street. If AOL wanted Time Warner's content, they could have just made a deal to get it without going and buying the whole darn farm. To use a word Peter Lynch coined, I think this merger is an expensive "diworsification" at its best.

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