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The Honolulu Advertiser
Posted on: Tuesday, December 20, 2005

Google-AOL deal 'a win-win'

By Jonathan Thaw
Bloomberg News Service

Google Inc.'s agreement to buy a stake in Time Warner Inc.'s America Online values the Internet company at $20 billion, twice as much as Wall Street estimates.

Fetching such a high price from Google, the world's most popular Internet search engine, may bolster Time Warner Chief Executive Officer Richard Parsons as he faces pressure from billionaire investor Carl Icahn to raise the stock price or break up the company.

"This will require all of us on the sell side to revalue the AOL piece of Time Warner," said Laura Martin, an analyst at Soleil Securities Corp., in Pasadena, Calif., who has a "buy" rating on Time Warner and values Dulles, Va.-based AOL at $14 billion.

Google last week agreed to pay New York-based Time Warner $1 billion for a 5 percent stake in AOL, according to a person familiar with the deal. Most analysts have valued AOL at $10 billion to $15 billion, said J.P. Morgan Securities' Spencer Wang.

The accord snatched AOL away from Microsoft Corp., which had been in partnership talks for almost a year. Aside from winning a victory against Microsoft, Mountain View, Calif.-based Google will retain its largest search customer and will also gain access to AOL's content and video search features. Parsons, CEO of the world's largest media company since May 2002, needs Google's search and advertising technology to bolster AOL's ad revenue and counter a loss of paying subscribers.

"This allows Time Warner to retain the strategic upside of AOL," Martin said. "It retains for Google a major part of their revenue. It's a win-win for both companies."

Time Warner spokesman Ed Adler declined to comment as did Lynn Fox, a spokeswoman for Google. Stacy Drake, a spokeswoman for Microsoft, also declined to comment.

A value of $20 billion on AOL may make it harder for Icahn, who has pressed for changes at Time Warner since August, to claim Parsons isn't reaping value from AOL.

In an open letter yesterday, Icahn said Time Warner's deal tying AOL to Google may be "short sighted" if it precludes other transactions involving the unit.

Shares of Time Warner are down 7.7 percent this year. The shares fell 5 cents to $17.95 at 4 p.m. in New York Stock Exchange composite trading. Google shares, which have more than doubled this year, fell $5.55 to $424.60 in Nasdaq Stock Market composite trading. Microsoft fell 7 cents to $26.83.

AOL founder Steve Case, a Punahou School graduate who orchestrated the $112 billion combination between America Online and Time Warner in 2001, last week joined Icahn in calling for Time Warner to be broken up.

A venture with Google doesn't prevent AOL being spun off later, said Rob Sanderson, an analyst at American Technology Research in San Francisco.

The price paid by Google also illustrates the lengths the company will go to win a battle with a competitor, this time Redmond, Wash.-based Microsoft. It shows the value Google places on retaining a slice of the advertising revenue that AOL brings in, and access to content from AOL, such as entertainment videos and news.

"From Google's standpoint there has been and there continues to be more fear from what Microsoft could do just because of their vast resources," said Martin Pyykkonen, an analyst with Hoefer & Arnett Inc. in Denver.

Parsons, 57, who once attended the University of Hawai'i, and Google CEO Eric Schmidt, 50, hatched the agreement in New York late Thursday, according to a person familiar with the discussions, who declined to be identified because the talks are confidential. Parsons phoned Microsoft CEO Steve Ballmer, 49, the next morning to tell him AOL was pursuing a deal with Google, that person said.

The agreement will be presented to Time Warner's board today, the person said.