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Burden of Proof

Media Conglomerate Time Warner Merges with America Online

Aired January 10, 2000 - 12:34 p.m. ET



STEVE CASE, CHAIRMAN AND CEO, AMERICA ONLINE: The merger of the number-one Internet company with the number-one media company will bring together the best of both worlds and create one of the most respected and most valuable companies in the world with strengths in every link of the media value chain.


GRETA VAN SUSTEREN, CO-HOST: Today on BURDEN OF PROOF: It's the largest corporate merger in history. Media conglomerate Time Warner merges with America Online.

ANNOUNCER: This is BURDEN OF PROOF, with Greta Van Susteren and Roger Cossack.

VAN SUSTEREN: Hello and welcome to BURDEN OF PROOF.

Today in New York, executives of Time Warner and AOL announced plans to merge the two companies. The deal represents the largest merger ever.

ROGER COSSACK, CO-HOST: Time Warner is the world's largest media empire, also the parent company of CNN. AOL is the nation's largest on-line company with 20 million subscribers.


GERALD LEVIN, CHAIRMAN AND CEO, TIME WARNER: For me, this represents the digital transformation of Time Warner. For those of you who know me well or who have read things that I have distributed within our own company, that's been my conviction. And with this transaction, that dream is realized.


VAN SUSTEREN: Joining us today here in Washington are Stephanie Carlton (ph), law professor Todd Zywicki, and former FTC Director of Competition William Baer. And in our back row, Edwina Davis (ph), Phyllis Martin (ph) and Aryan Hulsbos (ph).

Todd, let me go first to you. Is this a merger or an acquisition, and what's the difference? TODD ZYWICKI, ASSISTANT LAW PROFESSOR: I haven't had a chance to study all the details of the deal, but it appears to be a merger in which case there's a -- the two companies will combine into one. AOL is trading -- releasing stock, essentially, in exchange for Time Warner's stock. Excuse me. My understanding is that both boards have, in fact, approved the deal initially. And at some point down the road, then, the shareholders will have to sign off on the deal.

VAN SUSTEREN: Bill, do you agree this is a merger, and does it make any difference whatsoever in terms of law whether it's a merger or an acquisition?

WILLIAM BAER, FMR. DIR., BUREAU OF COMPETITION, FTC: From an antitrust point of view, which is the area I know a little bit about, it doesn't make a difference. You still have to analyze it to see whether or not consumers are going to be better off or worse off after the deal.

COSSACK: Now, when you look at it from that standpoint, consumers better off, consumers worse off, what kind of values do you take into consideration?

BAER: Well, the first value is access to quality product at competitive prices. And the CEOs -- we just saw them before we came on the air -- take the view that this will provide Time Warner's pipeline into the home to all sorts of AOL subscribers, and that's a good thing. More people will get high-speed Internet access. So that's one value you look at is what's the upside to consumers.

But the downside is, will there be some bottlenecks created? Will Time Warner, AOL combined be in a position to disadvantage other Internet service providers, and will that, ultimately, injure consumers?

COSSACK: I was going to say, but just because they are in a position or might be in a position to injure other Internet providers, that's not enough to stop this merger. Don't you have to show that they actually use that power to do something wrong?

BAER: Well, in analyzing a merger, you never know for sure what's going to happen next. You're predicting the future, so you always have to make a judgment call about whether somebody's going to be in a position to injure competition and injure consumers. I'm not saying that's what's going to happen here, but those are the sorts of questions the antitrust regulators will need to look at.

VAN SUSTEREN: Todd, what are the potential injuries to other Internet providers that will be looked at?

ZYWICKI: Well, they'll look at a variety of different sorts of factors. In a case like this, it's hard to see where the injury to other Internet providers are; if you look at Yahoo!, for instance, the performance of their stock today. But they'll look at, sort of, things such as the overall concentration in the industry, whether this creates barriers to entry, and a variety of different sorts of factors. VAN SUSTEREN: But isn't -- I mean, I assume, that the merger presents an awful lot of economic muscle when you put two very successful corporation together. And isn't that a little bit about what Microsoft ran into in terms of the Department of Justice. They had so much economic muscle that it was assumed that it would hurt, in the future, the consumer.

ZYWICKI: That was the argument. I think that -- leaving aside the merits of the Microsoft case, I think this is a very different situation, from what I understand of this deal. In the Microsoft situation, the government argued that they were using their alleged monopoly in their operating system to leverage into the browser field.

This is a situation where you've got two companies basically providing content; neither one is alleged to have a monopoly in either market, and, essentially, what you have here, it seems to me, more just a simple bundling of services and more efficiencies. You don't have a monopoly on one market -- or alleged monopoly in one market that's being used to leverage into another market.

COSSACK: But doesn't -- Bill, would this -- if this is a recognition, I suppose, by these companies that the future is television/Internet, doesn't this -- wouldn't this mean that perhaps we could look for other mergers from other major media corporations? For example, what about MSNBC and Microsoft -- or NBC and Microsoft?

BAER: You know, certainly we've seen that in the past few years: Disney CapCities ABC. Time Warner bought Turner a few years ago and the Federal Trade Commission where I was looked at that very closely. One would expect that other companies who provide programming content, other cable companies, other Internet service providers, would need to reassess their strategic position and decide whether to move.

From an antitrust point of view, if that happens, then you have to look at the combined effect of a series of deals and making a judgment about whether consumers are going to be better off or worse off over the long run.

COSSACK: But if you allow this, how can you stop the next one?

BAER: Well, the point is, if it incrementally gets to the break point, at some point a company becomes a monopolist, at some point a company has enough of a marketshare that it can raise prices to consumers, anti-competitive levels. So, you make a judgment call in looking at any merger as to whether or not this one is just too much. If a bunch are happening at the same time, it's also fair to say is the combined effect too much and maybe we ought to look seriously at them all.

COSSACK: All right, let's take a break.

Up next, what does today's news mean for consumers and the millions of Americans who hold stock in media and online companies? Stay with us.

(BEGIN LEGAL BRIEF) Amatto McCullough was convicted of felonious assault eight years ago for stabbing a man. The victim recently died of heart failure caused by the stab wound. Ohio prosecutors now plan to charge McCullough with murder. McCullough's lawyer is expected to argue that the arrest and prosecution would be double jeopardy.



VAN SUSTEREN: Good news for our Internet-savvy viewers: You can now watch BURDEN OF PROOF live on the Worldwide Web. Just log onto and click your way to the BURDEN OF PROOF link. We now provide a live video feed Monday through Friday at 12:30 p.m. Eastern Time. And if you miss that live show, the program is available on the site at any time via Video On-Demand.


TED TURNER, VICE CHAIRMAN, TIME WARNER: Shortly before 9:00, last night, I had the honor and privilege of signing a piece of paper that irrevocably casts a vote, the first vote taken, a vote of my hundred million shares, more or less, for this merger, and I did it with as much or more excitement and enthusiasm as I did on that night when I first made love some 42 years ago.


COSSACK: Today's announcement from Time Warner and America Online sent the stock market into record territory, but how will this historic merger affect stockholders and consumers in the long run?

Todd, let's talk about what role the shareholders' play in this. My boss, Mr. Turner, voted his hundred million shares in favor of it. What does that really mean for those people that own small amounts of shares? Do they really have any say in this?

ZYWICKI: Sure. They have an opportunity to vote their shares, and one of -- and one of the reasons why Time Warner is trading at such high levels, the takeover premium, is essentially the fact that they're paying, to some extent, for the voting privilege, that that's one of the reasons why we see a spike in the value of stock. So, every share has a vote.

In this situation, one of the key elements to this is that the boards of directors, as I understand what has happened, the boards have unanimously agreed to the merger on both sides. They will recommend it, then, to the shareholders, and it's pretty rare that the shareholders in that situation would decide not to follow the recommendation of the boards of directors.

VAN SUSTEREN: Bill, in order to merge, they -- ultimately to merge, they have to have permission from the federal government. We have the Federal Trade Commission and the Department of Justice, both have antitrust divisions. Explain the different role of the two government entities and what you expect to be the process. BAER: The role is actually very similar, and the big point is either one, the Justice Department or the FTC will look at it. They have a clearance arrangement in which they decide based on who has the best experience in the markets which agency will hand it. Once...

VAN SUSTEREN: All right, predict that. I mean, how do you make that determination?

BAER: I can't predict that, because I don't know exactly enough about this deal. They'll decide that the next couple of weeks.

VAN SUSTEREN: Is there sort of jockeying for position in the sense that it's sort of territorial, like the FTC would like to be the one to look at it or the Department of Justice and they both want it?

BAER: I suppose any interesting deal, lawyers and economists who do this for a living who are sick enough to have this as their specialty, would want the opportunity to examine it, to help make a judgment about whether it's a good thing or a bad thing.

VAN SUSTEREN: But -- I mean, I don't want to belabor the point, but suppose that they -- you know, that they come to sort of -- they lock horns because they both want it. Someone must have preference, so there must be a superiority in terms of who gets preference.

BAER: In the past -- I was at the FTC for five years. When we reached that point, Joel Klein or I, or Bob Pitofsky, Joel Klein and I would sit down and work it out, and it's done quickly and efficiently, because the agencies want to get on with their work. There's enough merger and acquisition activity around that the staffs of both of those agencies are pretty busy right now.

VAN SUSTEREN: OK, take me beyond that. Suppose that the Justice Department takes control of this. What goes on?

BAER: They first get detailed information from both companies about what it is they plan to do and what markets in which the two compete. And the initial focus of antitrust is, to what extent are these firms head-to-head competitors today? The second question is, to what extent are they going to be head-to-head competitors tomorrow? Are you going to be losing a little bit of that? And then the third question, assuming there aren't real problems, because I don't think these firms today are significant head-to-head competitors, is will someone as a -- will the combined firms as a result of this deal potentially be in a position where they can control the Internet or control access to the Internet, and they'll look at that question.

VAN SUSTEREN: But if you get information from Time Warner and AOL, I assume it's going to be information that this is the greatest thing that ever happened. What about the other viewpoint? Who presents that?

BAER: Well, first of all, looking at the companies' documents that existed before this great idea came into the CEOs' heads often gives you a sense of how they view the market on a day-to-day basis, and the fact that they may be saying something today can be tested out as to how they were behaving in the marketplace yesterday.

But second, you talk to other firms. No one who is a competitor of AOL or Time Warner, who thinks they're going to be worse off after this deal, is going to be reluctant to pick up the phone and call and schedule a visit at the Justice Department or the FTC to explain why they're concerned, and so there will be lots of folks out there, if there are problems, who'll be coming in and explaining why they think there are problems with this deal.

COSSACK: What's the time limit before this will be complete?

BAER: The time limit really is under control of parties. Under the merger review process, the government gets to ask for information, detailed information. Once the parties, both parties, have supplied that information, the government has to act within 20 days. Now, providing the information that's sought often is very detailed, requires a lot of time. When we looked at the Time Warner-Turner deal at the FTC four years ago, it took about nine months to get from today's announcement to consummation of the deal with the consent decree. So, that kind of timeline wouldn't be unrealistic.

VAN SUSTEREN: We'll be right back. We're going to take a break. Stay with us.


Q: Why are Boulder, Colorado officials not cooperating with a television movie about the JonBenet Ramsey case?

A: They say it is inappropriate because the investigation is still active. As a result, actors have been allowed to use Boulder police badges and uniforms, the city seal or the local justice buildings.



VAN SUSTEREN: What started as a magazine by two Yale students in 1923 has grown into a media and Internet conglomerate in a marketplace the roaring '20s could hardly imagine. Today's announcement that there is merger created a new company, AOL-Time Warner.

Todd, does it make a difference when two big corporation are thinking about merging, does it make a difference which parties that are of different philosophy, but does it make a difference which party is in the Department of Justice, whether it's Democrats or Republicans?

ZYWICKI: It seems that -- anecdotal evidence at least suggests that it does, that the Democratic administrations tend to be -- look more closely at merger activity than Republican administrations. I think the Ronald Reagan administration, being a good example, where there were very -- where there was very light scrutiny of mergers. But there's also sort of -- there's a lot of career people involved, as well, who look at these sorts of things, but I think that we could expect, especially given the concern that the Clinton administration has shown on these various sort of Internet-related things, that they might give it a little bit more scrutiny than say George W. Bush or Steve Forbes, for instance, administration might.

COSSACK: Bill, is it just coincidence that this announcement is made today, which is the first working Monday of the new millennium, or is this something that was...

VAN SUSTEREN: We worked last Monday.

COSSACK: Well, you know what I mean, the first real -- that perhaps was held over until this date for a lot of tax reasons and for other reasons.

BAER: I can't tell. I do assume, though, that because of the extraordinary public interest in such a deal, that they worked quickly to get the news out as soon as they got to yes, that the most important thing was not to have it leak out piecemeal and create all sorts of issues of insider trading and speculation. So it is quite marvelous, I think, that this is the biggest deal in history has really dropped on us like a bombshell without anyone really knowing it was coming.

VAN SUSTEREN: Todd, what do you think the lawyers who represent the two corporations are busy doing today?

ZYWICKI: Probably sleeping today. The protocol on one of these things is you pretty much work around the clock to get one of these things done.

VAN SUSTEREN: Let me just ask you one thing, in terms of working around the clock, I mean, is that one of the reasons they do that is because you worry about leaks?

ZYWICKI: That's one of the reasons is that a lot of times the actually papering of the deal, and the nitty-gritty and the fine- tuning isn't really done until the very last second. I'm sure that, although they're friends today, I'm sure that Mr. Case and Mr. Levin were negotiating pretty hard, or representatives were negotiating pretty hard up until the weekend, most certainly. So they sort of negotiate to the very last second and then the lawyers kind of swoop in and paper the deal.

Now, to a large extent, it becomes a waiting game, as Mr. Baer was indicating earlier.

COSSACK: Bill, we heard the phrase "insider trading." What exactly does that mean in terms of say something like this?

BAER: Well, the concern under the securities laws would be if someone had advanced word that this deal was going to happen and went and bought up stock of the two companies in anticipation of the stock going up, that would or could be unlawful. So the concern is, if you're the companies putting the deal together, is to minimize the opportunity for that speculation, for those legal difficulties to arise. And as I said, it is just extraordinary that a deal of this size and complexity would spring on us full-blown.

VAN SUSTEREN: How do you monitor whether someone in the last four or five days made a lot of money on this merger that was announced today. I mean, how does the SEC find those people?

BAER: The SEC has sophisticated computer tracking equipment and can generate a printout of those folks who buying or selling heavily in a particular stock before a major announcement, and then they can go back and find out why.

VAN SUSTEREN: I mean, I tell, I mean do they actually know -- I mean, how do they track that the person is somehow connected with the company or the person somehow has insider information. I mean, how do you take it beyond the step of someone making a huge transaction in the last few days?

BAER: Well, you contact the person or contact the company to find out if the individual has some connection with the company. That is where the legwork starts. The mere fact that someone made money betting that something would or would not happen doesn't make it unlawful. It's a question of how they got the information and whether there was illegal inside information being funneled that way.

COSSACK: Todd, what are the responsibilities of those who work on it. The lawyers that we have talked about working around the clock, those kinds of people not to get involved or not even to tell anyone?

ZYWICKI: It's -- it's, the cardinal sin. It is one of the most important ethical canons of a lawyer, and the corporations themselves have very strict rules that they put into place, and they keep tabs on what people are doing in the days leading up to the merger.

They inform their employees that there is a complete blackout on anything that they're supposed to say to the media and the SEC. And they bring in lawyers and they inform the people to the consequences of something like that happening. So they make -- when something like this is going on, they make it clear and tell people what they are supposed to do and what they are not supposed to do across the board.

VAN SUSTEREN: Bill, the decision whether the government OKs it, it is judgment, not simply a bright line test; is that right?

BAER: That's right, it requires a lot of judgment and, as I said earlier, little bit of time.

COSSACK: All right. I guess that's all the time we have for today. Thanks to our guests and thank you for watching.

You'll get your chance to weigh in on this historic merger on CNN's "TALKBACK LIVE." How will today's developments affect you? That's at 3:00 p.m. Eastern time, noon Pacific.

VAN SUSTEREN: And we'll be back tomorrow with another edition of BURDEN OF PROOF. We'll see you then.


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