Stockholder Jitters Cast Shadow Over AOL Time Warner

After triggering an initial Wall Street flurry, the proposed monster merger of America Online and Time Warner is causing stockholders of both companies to have second thoughts.

In 4 p.m. trading yesterday on the New York Stock Exchange, shares of AOL tumbled $4.50 to $60 (US$), while Time Warner fell $5.81 to $79.25. Since Monday, AOL shares have declined 17 percent, and Time Warner — whose shares soared initially — have fallen 12 percent.

Over the last two days, the so-called deal of the century has been slashed by $24.65 billion, making some industry analysts question the feasibility of merging Internet companies with old-world firms.

Is a Suitor in the Wings?

The sharp decline in the value of both companies’ stocks has sparked speculation on Wall Street that a cash-rich company such as Microsoft Corp. or General Electric could put a bid on the table for either AOL or Time Warner.

However, since Microsoft is already in hot water with the Justice Department over alleged antitrust violations, the company seems unlikely to mount such an aggressive move. Similarly, it is also doubtful that GE would be willing to dilute its earnings by embarking on such a shopping spree.

Finally, any potential suitor would also be obligated to absorb a huge termination fee. In AOL’s case, that figure would be 2.75 percent of the market capitalization of the company on Friday.

Majority of AOL Stock in Private Hands

Meanwhile, some industry observers contend that AOL’s stock may be prone to such volatility because ordinary investors own the majority of the company. Institutional investors hold just over 46 percent of AOL’s 2.58 billion shares, according to First Call/Thomson Financial Data.

Nonetheless, some analysts are predicting that AOL’s earnings report — which is due to be released next Wednesday — could quickly reverse its sliding price by reminding its doubting stockholders how powerful a company it is.

Yahoo! Takes A Hit

In a separate development yesterday, shares of giant Web portal Yahoo! plummeted 10 percent despite the fact that the company announced fourth quarter earnings of 19 cents per share.

Yahoo! shares skidded $39.81 to $357.58 on the news, making many analysts scratch their collective heads.

Some speculate that Yahoo’s earnings were below the unofficial “whisper” estimates of as much as 20 cents a share, sparking the stock’s sudden downturn.

Yahoo! also reported that it got a strong boost in its fourth quarter from holiday e-commerce.