Moneyline News Hour

AOL and Time Warner Announce Merger; Dow Rises 49.64 to 11,527.20; Nasdaq Jumps 167.05 to 4,049.67

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

STUART VARNEY, CNN ANCHOR: The megamerger for the new millennium. America Online will team up with Time Warner, the biggest deal in corporate history.

WILLOW BAY, CNN ANCHOR: The complete surprise set off an explosion of trading in AOL's stock and propelled Time Warner shares into the stratosphere.

VARNEY: That rally spread across the Nasdaq in the single- biggest one-day point gain ever.

BAY: We'll hear from the executives who announced the megadeal at an all-out corporate love fest.

(BEGIN VIDEO CLIP)

GERALD LEVIN, CHAIRMAN, TIME WARNER: We've become a company of high-fives and hugs.

(END VIDEO CLIP)

BAY: But does that guarantee they can share the corner office of the world's biggest media company?

ANNOUNCER: This is the MONEYLINE NEWS HOUR. Reporting tonight from New York, Stuart Varney and Willow Bay.

BAY: Well, it is nothing short of a blockbuster deal, tailor- made for the new economy and the new century.

VARNEY: Well-said. America Online, merging with Time Warner, parent of this network, in the biggest deal the world has ever seen. The $164 billion merger brings together Time Warner, which traces its venerable history back to the roaring '20s, and AOL, the Internet powerhouse that helped define the roaring '90s.

While billed as a merger of equals, Wall Street treated Time Warner's stock like it was a hot acquisition, the shares rocketing nearly 40 percent.

We begin our extensive coverage with Greg Clarkin outside Time Warner's headquarters in New York -- Greg. GREG CLARKIN, CNN CORRESPONDENT: And Stuart, this is a deal that caught many not only on Wall Street but in the media business by surprise. But apparently, it was a deal that was in the works for quite some time. Now, at a press conference this morning in New York, in midtown Manhattan, the executives saying that basically Steve Case and Gerry Levin have been talking for a number of months.

The two actually traveled to China in late August and September on business, and by October Steve Case felt comfortable enough to put forward a proposal of this merger of equals, as they call it. And that is where things wound up today.

Now, let's listen, if we can, to some of what the executives had to say on this deal.

(BEGIN VIDEO CLIP)

STEVE CASE, CHAIRMAN & CEO, AMERICA ONLINE: This really is a historic moment, a time when we transform the landscape of media and communications. The merger of the No. 1 Internet company with the No. 1 media company will bring together the best of both worlds.

LEVIN: This really provides the opportunity, just as we're in this remarkable digital century and Internet world, to bring to bear everything from communications to content to distribution in really a socially meaningful way.

(END VIDEO CLIP)

CLARKIN: Now, a transition team will be getting together this week to try to implement this deal. This is a deal that both parties say they hope to close by the end of the year. And keep in mind, we are only in January. And the name of the new company: It will be AOL- Time Warner.

Stuart, back to you.

VARNEY: We'll be checking in again with you shortly. Greg Clarkin outside Time Warner's headquarters in Manhattan.

BAY: This deal combines two of the world's best-known brands. Time Warner reaches millions of living rooms through televisions, movies, music and magazines. And America Online brings the Internet to 20 million people worldwide.

Susan Lisovicz has more.

(BEGIN VIDEOTAPE)

SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): America Online became the No. 1 Internet service provider long before it began offering this.

COMPUTER VOICE: You've got mail.

LISOVICZ: E-mail and Instant Messenger are among the services that come with the 21.95 monthly subscriber fee. With its purchase of the world's biggest media company, AOL says consumers will now get a lot more click out of their keyboards.

ROBERT PITTMAN, PRESIDENT & CEO, AMERICA ONLINE: These household names will become more accessible than ever to consumers in an Internet age.

LISOVICZ: AOL's Bob Pittman can say that because Time Warner, parent company of CNN, also owns more than a half dozen other cable channels, one of Hollywood's best-known film studios, and one of the world's biggest music companies. And the Internet offers users new ways to experience that content.

MICHAEL KUPINSKI, A.G. EDWARDS: As the Internet develops and becomes more rich -- in other words, it has streaming video capabilities -- you can watch a movie over the Internet, for instance, or you can buy a movie over the Internet or buy a CD or music over the Internet. It's going to proliferate, in my view.

LISOVICZ: And because Time Warner offers AOL the potential of high-speed access to the Internet through its cable systems, consumers will theoretically get anywhere in cyberspace faster.

ANYA SACHAROW, JUPITER COMMUNICATIONS: And at the same time, consumers will have a machine that's always on. So they will have a continual round-the-clock access to all sorts of information, news and programming.

LISOVICZ: Perhaps the biggest benefit to consumers may be the competition it fuels, which could lower prices.

PORTER BIBB, TECHNOLOGY PARTNERS: It will be very price- competitive and price-intensive, and that's going to give the consumer a choice and a benefit, because there are more cable companies than Time Warner.

(on camera): Every big media deal is driven by an effort to increase shareholder value. If AOL and Time Warner can quickly integrate their technology as well as their content, the benefits are unquestionable for consumers as well.

Susan Lisovicz, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: Just how much will shareholders benefit? The deal calls for Time Warner shareholders to get 1 1/2 shares of the new AOL-Time Warner stock for every share they own. Based on AOL's closing price Friday of 73 3/4, that deal is worth $164 billion plus the assumption of $17 billion in Time Warner debt.

America Online will control the new company, owning 55 percent; Time Warner will own the other 45 percent.

If the deal goes through, AOL-Time Warner stock will trade on the New York Stock Exchange under the AOL symbol. Time Warner investors cheered the huge premium AOL is paying -- 71 percent based on Time Warner's closing price Friday. Time Warner stock jumped 25 5/16, or nearly 40 percent. America Online lost all of its early gains, finishing down 1 7/8 of the day.

VARNEY: This record-setting merger ignited a huge stock rally and another record-setting session for Wall Street.

Rhonda Schaffler covered today's market action at the New York Stock exchange. She joins us now live with all the details for us -- Rhonda.

RHONDA SCHAFFLER, CNN CORRESPONDENT: Stuart, the media deal had this trading floor buzzing with activity. America Online and Time Warner were among the most actively traded stocks on the big board today. The trading posts were bustling. Here's a look at AOL's trading post, where a big crowd was gathered throughout the day. Excitement over the deal sparked a rally in other media and Internet stocks as investors bet that more mergers would follow.

Gains in stocks like Dow component Disney helped push the blue- chip index to another record. The Dow gained 49 points, closing at 11,572.

No record for the Nasdaq, but that index did notch its biggest one-day point gain ever. With an advance of 167 points, the Nasdaq closed at 4,049.

Volume easily topped a billion shares at both exchanges -- Stuart.

VARNEY: Rhonda Schaffler in the thick of it at the big board. Thank you, Rhonda.

BAY: Propelling the Nasdaq today, media and Internet stocks. They exploded on hopes that the AOL-Time Warner deal will set off a new wave of M&As in the media business.

Fred Katayama takes a look at the potential buyers and sellers.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): It took more than 650 deals last year to ring up $230 billion in media mergers. By contrast, analysts say the $164 billion marriage between Time Warner and America Online is so big, so financially and strategically powerful that others which recently went to the altar will have to seek additional suitors to get bigger.

FREDERICK MORAN, JEFFRIES AND COMPANY: The other Internet and media deals really focussed on one area or the other. You look at Yahoo! buying Geocities and Broadcast.com. That was about embellishing the Yahoo! Web site. And you look at CBS getting bought, or merging in with Viacom. That's really about enhancing the whole advertiser offering. KATAYAMA: Time Warner is being merged into an Internet company that makes money. Other deals saw old media companies take stakes in unprofitable Web firms.

And the Time Warner deal brings enormous content to AOL. Analysts say its rival, AT&T, which is gambling more than $100 billion on cable links to the home, lacks content. An AT&T spokesman said: "We have no intention of getting into the content business." But AT&T's affiliate, Excite@Home, says it can use some more content from traditional media.

GEORGE BELL, PRESIDENT, EXCITE@HOME: Anyone who can help us build out the richness of our content, the uniqueness of our content, becomes attractive to us.

KATAYAMA: On Wall Street, most media and Internet stocks surged, as we've seen. Investors bet on companies they see as potential merger targets.

Among them, Yahoo!, Lycos, News Corp. and Disney. Disney, like Time Warner, has lots of content, such as TV programs and movies. Analysts believe this makes Disney ripe as a merger target with the likes of Excite or Yahoo!.

(on camera): And in an age of skyrocketing Internet stocks, analysts say don't be surprised if the Internet companies, like Yahoo!, are the acquirers.

Fred Katayama, CNN Financial News, New York.

(END VIDEOTAPE)

VARNEY: While they're mulling deals of their own, AOL and Time Warner rivals will look for any antitrust problems with today's historic deal. Federal regulators have yet to sort out just which agency will review the merger.

No matter who gets the job, the deal will come under tough scrutiny. Allan Dodds Frank reports.

(BEGIN VIDEOTAPE)

ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): The two top executives wasted no time trying to dispel antitrust concerns. They addressed possible problems that could take months of examination by the Justice Department, Federal Trade Commission, Federal Communications Commission, Securities & Exchange Commission, and Congress. The new company would suddenly give the nation's biggest Internet service provider access to the nation's second-biggest cable TV system. But AOL Chairman Steve Case suggested he would not use that advantage to keep out competitors without cable systems.

CASE: So that we don't expect there to be any antitrust issues. The big issue we thought would be related to open access, and we want to just take that off the table on day one by committing to that principle. FRANK: But much as in the case of Microsoft, legal experts expect AOL's competitors and public interest groups to speak out. They will point out to regulators the potential the combined company has to limit access both on cable systems and on Internet screens.

HARVEY GOLDSCHMID, COLUMBIA UNIVERSITY LAW SCHOOL: That restriction of access for independent competitors who may not be able to get into the game, that is a key antitrust concern. And so it's blockage, it's restriction of access that may create a competitive problem. And certainly, the antitrust agency's going to want to look at it hard.

FRANK: Still, it may not be easy to convince regulators consumers will be harmed.

PROF. ELEANOR FOX, NEW YORK UNIVERSITY LAW SCHOOL: This has to come home in a way that isn't just about protecting competitors. It has to come home in a way that hurts the individual consumer user.

FRANK: Patrick Leahy, the ranking Democrat on the Senate Judiciary Committee, says the sheer range of the new enterprise requires review.

(on camera): Legal experts say the proposed merger also faces questions from state attorneys general, local cable authorities and antitrust agencies abroad.

Allan Dodds Frank, CNN financial news, New York.

VARNEY: Now, coming up on MONEYLINE, the vision that shaped an online titan. We'll tell you about the remarkable and profitable ascent of AOL.

BAY: Plus, we'll ask three top analysts what today's alliance could mean for media investors.

ANNOUNCER: From CNN's New York headquarters, this is THE MONEYLINE NEWS HOUR.

(COMMERCIAL BREAK)

VARNEY: More now on our top story, the new media megamerger of Time Warner and AOL. AOL shareholders will own more than half of the new behemoth, but by most measures Time Warner dwarfs AOL, in terms of sales, scope and depth of corporate history. Time and Warner, both founded in the '20s, came together in one of the most tumultuous takeover sagas of the '80s, a deal that finally closed exactly 10 years ago today.

(BEGIN VIDEOTAPE)

(voice-over): Time Warner, through its movies, cable, music and publishing businesses, employs nearly 70,000 people. It pulled in revenues over the past four quarters of $17.7 billion, an income of $1.2 billion. America Online, formed in the mid-'80s under a different name, launching what we know as AOL in 1989. It employs a fraction of the workers Time Warner employs and had less than a third of the revenues in recent quarters. Income trailed Time Warner over the same period.

But AOL far outshines Time Warner in one critical respect: Its market value as of Friday was nearly double Time Warner's.

BAY: For more on the future of this megamerger, we've gathered three top media analysts here in our studio, including Jessica Reif Cohen of Merrill Lynch, Chris Dixon of PaineWebber and David Londoner of Schroeder.

Now here we are. We've lived with this all day. We're still shaking our heads.

Chris, let's start with you.

Is this just a staggering validation of the power of the Internet, that an Internet company, even one with profits, can acquire the world's largest media company.

CHRIS DIXON, MEDIA ANALYST, PAINEWEBBER: I think that's the case. What we're really seeing here is that the Internet is no longer just about a 28.8 world. It's going to become much more television- like. It's about streaming and it's about bandwidth, and clearly what this deal does is this new company is able to define, set the agenda, for what the Internet's going to be as it takes part in this new digital age.

BAY: So of all the assets combined in this alliance, is bandwidth at the top of the list in terms of (OFF-MIKE)?

DIXON: I think there's three pieces. The first piece is content, the second piece is sheer scale, and the final piece is connectivity, the ability to connect and be program-distributed to lots of players. So it's those three pieces. And what's unique about it is these three companies fit extraordinarily well to provide that kind of size and scope and scale.

DAVID LONDONER, MEDIA ANALYST, SCHROEDER: Yes, yes -- OK, we're in the same...

BAY: You do, you think content -- you're in sync on this. Content is more important. Do you agree?

JESSICA REIF COHEN, MEDIA ANALYST, MERRILL LYNCH: (OFF-MIKE) differentiator between companies, absolutely.

BAY: You had some concerns about Time Warner, downgraded it in part because of issues about their Internet strategy. They got that and then some.

COHEN: There's no question. Our concerns when we downgraded were twofold. One, we thought there were no obvious, imminent catalysts. This came as a total surprise to everyone. BAY: So this is a catalyst, right?

COHEN: Absolutely, this is a catalyst. We were concerned that their Internet strategy would take years to evolve, which it would have if they didn't do this deal. And then our other concern was really very short-term. And that is that the next three quarters, we believe that their growth will slow below 10 percent. But this deal is not based on the next three quarters, it's really a five- to 10- year horizon.

DIXON: It also goes a long way to kind of marking the next step of Chairman Gerry Levin's strategic vision as to what digital can do for each of the core competencies, whether it's the entertainment, the music business, the information side of the house, if you will. And clearly digital is a big part of this world. And this creates an enormous catalyst and stimulus for a lot of the other companies now to decide how are they going to take part in the new digital age.

BAY: David, what do you think we're going to see, a flurry of deals?

LONDONER: Oh, yes. I suspected this was going to happen. Everybody else was behind, all right? All of a sudden, AOL-Time Warner leaps out in front of the entire pack. And everybody, I mean, I got to believe everybody was calling everybody else today and saying, hey, wait a minute. Where are we in this thing?

BAY: Yahoo!, are they out shopping right now?

LONDONER: They have to be. I don't...

BAY: For whom?

LONDONER: Well, you've got three major companies that are not part of this. You have News Corp., you've got Viacom-CBS, and you've got Disney. And if you work through them, the less logical candidates are going to be News Corp...

BAY: Less logical.

LONDONER: Less logical -- and Disney. The more logical one, I would say, is Time Warner CBS. And part of that is your shareholders. Sumner is willing to take a higher valuation, even though it will hurt his earnings on a per-share basis. Michael's not. And I don't think Rupert is.

BAY: So you call it shareholding, I might call it personality at the top. How important is that in terms of getting the companies together? Any of the mix.

DIXON: Well, it's interesting. I mean, what's interesting here is that Bob Pittman basically was born and brought up at Time Warner. So that goes a long way to making this deal fit and in fact integrate very quickly. The fact that Time Warner has lived through the merger of Warner, the merger of Time, and, of course, Turner, means that it's much more highly likely that this kind of transaction can move forward very quickly.

And it's very easy to say there's going to be a "me, too" transaction. I'm not quite so sure. I step back and say I can see Disney wanting to have more exposure to connectivity. Maybe you have a Worldcom-Disney deal. I can see News Corp. looking to have a jump start into the world of the Internet -- Yahoo! News Corp. Or you could even step back and say, yes, maybe CBS decides that they all of a sudden need to have exposure in new and different ways. But this deal really fits. It's an easy kind of transaction, and it makes an enormous amount of strategic sense.

BAY: Likely to see a reaction from AT&T?

COHEN: In some sort of deal making? Not in this case. I mean, I don't think so.

DIXON: Where did you get in on that?

LONDONER: I've heard it from a couple of barbs indirectly that they think that AT&T makes a move. In fact, I don't see it either.

COHEN: I don't see how this from a management or an asset perspective in this deal. But, you know, this is a very good fit. Our view is -- I'm more in the Chris camp, right? I just don't think you can see -- there's nothing of the scale and scope of AOL in the Internet. I mean, this is the biggest and, you know, if you step back, the studios, the film entertainment companies, have three incredibly unique assets. They are not out of the Internet game. They have very, very powerful programming, very expensive that can be repurposed. It's very hard to duplicate. They are the suppliers of the broadcast networks. They have brands, major brands throughout these organizations. And they also have media platform.

BAY: But when you say they're not -- they're not out of the Internet game, can they, with what they have now, compete against this new company? Yes?

DIXON: Absolutely.

COHEN: Absolutely. There will be value recognition. Viacom has publicly stated it will take MTVi public and may take Nickelodeon.com public and CBS.com public. So there will be value recognition.

BAY: You all figure we'll see a lot of that happening?

COHEN: Absolutely.

DIXON: The key thing here -- the key thing here is that what you have is this notion that the Internet is no longer just about print. It's about streaming. It's about -- and what Time Warner and AOL are now able to do is to set the agenda of what these new businesses are going to look like.

As those businesses evolve as to whether or not they're going to be contextual merchandising, to use a phrase that Barry Diller's been known to say, whether or not it's going to be downloading movies, downloading music, for the first time all of these companies have those assets and they're going to be able to emulate what's happening and certainly get the valuation. But they're not first.

BAY: Twenty seconds. One word from each of you to describe this deal, starting with Jessica.

COHEN: Stunning.

DIXON: Wow.

LONDONER: Bingo.

BAY: Thank you all for joining us. Wow is right.

MONEYLINE will be back right after this.

(COMMERCIAL BREAK)

VARNEY: As you might expect, quite a few stocks hit new 52-week highs, and they include Broadcom. It was up 29 points. Intuit, Amgen, Clear Channel Communications, and Advanced Micro Devices.

And it's Intel that tops tonight's MONEYLINE movers, up 3 3/4. Robertson Stephens upgraded the chipmaker to a buy rating and set a $100 price target. Analyst Dan Niles expects the Dow component to have a solid first quarter after missing estimates in the prior three quarters. Dan Niles also upgraded Sun Microsystems, and that stock gained nearly seven. He cited its strong bookings growth last quarter.

Aon sank 12 1/2, trading at nearly 10 times its normal volume. The insurance broker warned of a fourth-quarter profit shortfall due to weak results at its European division. And PSINet gained nearly 11 1/2. The Internet service provider expects record fourth-quarter revenue of $185 million. It cited strong demand in all of its units.

BAY: Other companies making news today -- and there were some -- Alcoa, the world's top aluminum producer, blew past profit forecasts for the fourth quarter. Alcoa, which benefited from cost-cutting and rising aluminum prices, set a two-for-one stock split and said it would boost its dividend by 33 percent.

General Motors announced it will take complete control of Swedish automaker Saab. GM already owned half of Saab and today said it will buy the rest from Swedish holding company Investor AB. GM declined comment on the price tag.

MONEYLINE will be right back.

(COMMERCIAL BREAK)

VARNEY: Ladies and gentlemen, it has been an extraordinary day, bearing in mind the scope and scale of the merger. We found out about first thing this morning.

BAY: Stunning, amazing, surprising, just a few of the adjectives used. And they weren't exaggerations.

VARNEY: They were not indeed.

And in our next half hour, Case and Levin Incorporated.

BAY: These two executives looked very happy today, but can they make AOL-Time Warner work tomorrow and beyond? We'll hear from both. And we'll look at their resumes and their personalities.

VARNEY: And the company that didn't even exist 20 years ago now on top of the media business: AOL, inside and out. Stay with us. We're coming back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

CASE: As we enter this Internet century, no company will be better positioned to capitalize on the convergence of media, entertainment and communications than AOL-Time Warner.

(END VIDEO CLIP)

ANNOUNCER: The MONEYLINE NEWS HOUR continues. Here again, Willow Bay and Stuart Varney.

VARNEY: The first megadeal of the 21st century shakes the media world to its core: America Online buying Time Warner, merging the biggest names in new and old media. We'll take a look at the engineers of this groundbreaking deal: the dot.com pioneer who helped to revolutionize the way people communicate and the men who were cable before cable was cool.

An electric reaction on Wall Street as well. Investors plowed money into old and new media stocks, catapulting the Nasdaq to its best point gain ever.

BAY: What better way to begin the so-called "Internet century": two giant companies and a colossal bet that the Web is the future of media. America Online is acquiring Time Warner, the parent of this network, in a deal the two are calling a merger of equals. The deal is the biggest in history, valuing Time Warner at $164 billion plus 17 billion in debt.

It's a merger on the grandest of scales, bringing together the best-known online brand and the largest stable of entertainment properties.

Greg Clarkin has more on a deal for the new millennium.

(BEGIN VIDEOTAPE)

LEVIN: It gives me great pleasure to welcome the suits from Virginia here to New York.

(LAUGHTER) CLARKIN (voice-over): It was a casual-looking Gerry Levin of Time Warner announcing a deal that was anything but casual: a merger between America Online and Time Warner, the biggest corporate tie-up ever. The deal values Time Warner at $164 billion. AOL will have a 55 percent stake in the combined company; Time Warner, 45 percent.

AOL also gets access to Time Warner's rich supply of content that it can then pump out to its 20 million Internet subscribers.

Time Warner owns some of the biggest brand names in the world: "Sports Illustrated" and "TIME" in magazines; CNN, CNNfn and HBO in TV; as well as Warner Brothers for movies and Warner Music Group for music.

CASE: We are very excited about joining forces with Time Warner, because we share a common vision for the future. Time Warner is the first major media company to not only recognize but to fully embrace the new interactive world. Together, we can change the future for the better.

CLARKIN: AOL will also have immediate access to Time Warner's 13 million cable subscribers, offering the Internet company a broadband platform to reach consumers.

SCOTT EHRENS, BEAR STEARNS: There are a lot of opportunities to leverage content that maybe was developed for offline media across online and vice versa. So now they have this great platform, they can cross-fertilize with content and redistribute. And you know, I really think we'll see operating profits for AOL explode as a result.

CLARKIN: And revenues are expected to explode as well: $40 billion a year, by some estimates.

The new company will be called AOL-Time Warner. Time warner shareholders will receive 1 1/2 shares in the new company. It's a one-for-one swap for AOL shareholders.

(END VIDEOTAPE)

CLARKIN: Now, executives of both companies said this deal really is about advertising and commerce. Combined, the companies boast more than 100 million subscribers to their various properties. Analysts say at this point the trick really here is to capitalize on those subscribers by offering them more services as well as selling more advertising.

Stuart and Willow, back to you.and starting even more services. Back to you.

BAY: Greg, it's interesting that with a deal this size, there was really no hint of it. No rumors, no leaks, right?

CLARKIN: Exactly, Willow. And this is something that these companies have been discussing for a number of months. They kept it under wraps until this past weekend when it came together and this morning. BAY: Greg Clarkin, thank you.

VARNEY: Plenty of enthusiasm for this deal on Wall Street. Time Warner soared more than 25 points -- that's nearly 40 percent -- to a new 52-week high. But after being up more than six points earlier, AOL ended the day down 1 7/8.

The deal is expected to open up the rest of the media and online industries to consolidation. Disney rallied 4 3/4. GE actually fell fractionally. Viacom, up 4 7/8. CBS, which is being acquired by Viacom, gained more than four. News Corp. jumped 7 1/4. And AOL's competitors surged: They include Yahoo!, Excite@Home, Lycos, Microsoft, and NBCi.

BAY: A new week, a new tone on Wall Street as the excitement over today's megamerger spilled into the overall markets. The Dow industrials closed at another record high: the blue chip index up 49 points to 11,572. Volume on the big board: more than 1 billion shares.

But the bigger story today was on the Nasdaq. It posted its biggest point gain ever.

Charles Molineaux is standing by at the Nasdaq market site with more -- Charles.

CHARLES MOLINEAUX, CNN CORRESPONDENT: Well, Willow, the union of AOL and Time Warner touched off a wave of euphoria among technology stocks. The Nasdaq composite gained a one-day record 167 points as investors scrambled to find the next partners in the next convergence deal between a media company and an Internet company.

Take a look what (UNINTELLIGIBLE) over the course of the day today. Internet stocks surged almost 6 percent on the day today. Now, Excite@Home provides the kind of high-speed access the Time Warner deal gives to AOL. It gained 5 percent on the day today, or $2. Yahoo! is regarded as a potential acquirer. It gained 6.7 percent, or $27. RealNetworks already provides audio and video content on the Net. It was up by 5.9 percent.

We've also got to mention the dramatic performance by biotechnology stocks, which rose 7 1/2 percent after news that progress in mapping human genome has gone faster than expected. Immunex was up 14 percent, or $14.

Some market watchers call the AOL-Time Warner deal a permanent change in the market. Others say watch what these stocks do tomorrow after investors have a night to consider how much they've been bid up and think once again about stock valuations.

But it is a record day and the third-most actively traded day in Nasdaq history: 1.7 billion shares -- Stuart, Willow.

BAY: Charles Molineaux at the Nasdaq marketsite, thank you.

VARNEY: Perhaps the most intriguing part of today's deal, the men who will run the world's largest media empire. Two old-line media moguls and a dot.com entrepreneur.

Peter Viles now on the players, the personalities, and who wields the power.

(BEGIN VIDEOTAPE)

PETER VILES, CNN CORRESPONDENT (voice-over): If body language means anything, this wasn't just the biggest media deal ever; it was also the friendliest.

LEVIN: We've become a company of high-fives and hugs.

VILES: At a press conference on neutral ground, the Equitable Building in Manhattan, everyone was saying the right thing.

ROBERT PITTMAN, PRESIDENT, AMERICA ONLINE: This is the perfect one-plus-one-equals-three opportunity. We are the missing piece of each other's puzzle.

VILES: And everyone was on best behavior, even Ted Turner, who said he had looked the deal over and already voted his shares in favor of it.

TED TURNER, VICE CHAIRMAN, TIME WARNER: I did it with -- with as much or more excited and enthusiasm as I did on that night when I first made love some 42 years ago.

VILES: While any effort to merge two strong-willed and by all accounts successful management teams involves an element of risk, analysts were giving this experiment the benefit of the doubt.

TOM WOLZIEN, SANFORD C. BERNSTEIN: This is a good management team in this deal: People from both sides know what they are doing. Many of them have worked together in the past. Time Warner-AOL combination makes a lot of sense. The management here will most likely make it work quite well.

VILES: If there was any doubt the deal elevates AOL's Steve Case to full-fledged media mogul status -- a former Pizza Hut manager, Case has outlasted critics who said AOL's technology was too simplistic. At 41, he sits atop the world's biggest media company leaving day-to- day control to Time Warner's Gerry Levin.

JORDAN ROHAN, MEDIA ANALYST, WIT CAPITAL: I also don't think he has the time to run the entire company. I think shared responsibility is exactly what you're going to see here, by necessity. And I think that both of these leaders are used to sharing responsibility and will do a phenomenal job.

VILES: As chairman, Case would run a new 16-member board that would be split eight and eight between appointees of both companies. Levin as CEO would report to the board, not to Case. And the two chief operating officers, Bob Pittman of AOL and Dick Parsons of Time Warner, would report to Levin.

As for Turner himself, he would be the biggest individual shareholder in the new company, but he is sacrificing some of his clout.

(on camera): Turner gets to keep his title as vice chairman and he gets a big premium for his Time Warner shares. But his stake in the company goes down. He had a 7 percent stake in Time Warner. He would have just a 3 percent stake in the new company.

Peter Viles, CNN Financial News, New York.

(END VIDEOTAPE)

VARNEY: Well, Ted Turner may not get a fancy new title out of today's deal, but in one respect he is the biggest winner.

Before the merger, Turner's stake in Time Warner was worth more than $6 billion. That's based on Time Warner's closing price Friday. Tonight, Turner's stake stands at $8.7 billion. That's a one-day gain of nearly 2 1/2 billion.

BAY: Another shareholder who stands to benefit -- and it's one of Time Warner's biggest -- is Liberty Media. They own about 9 percent of Time Warner.

VARNEY: And it went way up today.

BAY: Indeed.

VARNEY: They did indeed.

Still to come on MONEYLINE, you've got much more than mail.

BAY: A look at how America Online has transformed itself from an upstart online service to the king of media.

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BAY: In addition to everything else, today's deal proves how much the Internet has changed the world and how important and powerful a player AOL is.

We have two reports now on the emergence of America Online as an American powerhouse, beginning with Kelli Arena in Dulles, Virginia.

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KELLI ARENA, CNN CORRESPONDENT (voice-over): At AOL headquarters in Northern Virginia, the mood was one of excitement and triumph. While we were not allowed to talk to them on camera, employees eagerly share the company's stated mission, sounding very much like AOL's chairman, Steve Case.

CASE: We have worked hard to fulfill our mission of building a medium essential to people's lives as the telephone or television, but even more valuable.

ARENA: The company's short history is staggering. Founded in 1985, it didn't even turn a profit until 1997. KARA SWISHER, AUTHOR, "AOL.COM": They were a lot of young people and headed by Steve Case, and he just believed that this was the way the future was going to go, that people were going to communicate with e-mail, that it was going to be a community-based kind of thing, that their would be interactivity. And this was before the Web.

ARENA: Analyst say Steve Case's strong suit is in communications and marketing, not technology -- which turned out to be a major plus.

WILLIAM WHYMAN, LEGG MASON PRESURSOR GROUP: One of the things that's made AOL successful is the focus on the consumer, on the market, on making it a simple and intuitive experience.

ARENA: AOL now boasts a 20 million-plus subscriber base. Revenues totaled $1.5 billion last quarter, and investors saw their shares almost double in value in the past year.

Before this merger announcement, analysts said AOL's biggest shortcoming was its lack of high-speed Internet access, especially over cable TV lines. Problem solved.

Kelli Arena, CNN financial news, Dulles, Virginia.

(END VIDEOTAPE)

(BEGIN VIDEOTAPE)

STEVE YOUNG, CNN CORRESPONDENT (voice-over): I'm Steve Young in New York.

Problem solved, indeed. America Online, the biggest Internet company in the world, now mainly delivers its service slowly over phone lines to PC modems. By the time its purchase closes, the 13 million customer Time Warner cable system is expected to be fully digital. Then, using cable modems, AOL will be able to pump its product at least 70 times faster than it can today over high-speed connections known as broadband.

The Time Warner deal will give AOL an edge over competitors like Microsoft.

CASE: We will draw on one another's strengths, combining the force of AOL's distribution capacity and Internet expertise with Time Warner's unsurpassed content and cable assets.

LEVIN: I am a broadband person. I am an interactive guy. I've been building networks all my life.

YOUNG: Instead of just complaining that AT&T hasn't opened its cable system, AOL is taking action. In addition to Time Warner content to keep subscribers coming, AOL gets a system that reaches nearly 20 percent of U.S. cable subscribers.

The deal is also a big boost for cable modems made by companies like Motorola against a competing kind of broadband technology. It's called digital subscriber line, or DSL, being rolled out by the phone companies.

JOE LASZLO, JUPITER COMMUNICATIONS: America Online will very decisively move in the cable direction. And I think DSL providers are going to have an even harder battle on their hands in terms of taking broadband market share away from the cable guys.

YOUNG: Cable companies have been talking about delivering interactive services like shopping and e-mail, but exactly how was unclear.

(on camera): Now many analysts are saying one answer is AOL TV delivered by a new company, AOL Time Warner.

Steve Young, CNN financial news, New York.

(END VIDEOTAPE)

VARNEY: As cable becomes increasingly important to the digital revolution, investors are treating cable stocks like Internet plays. Among today's big winners of the sector: AT&T, Cablevision, Comcast, Cox and Adelphia Communications.

BAY: Coming up, a conversation with the masterminds of the biggest media merger ever.

VARNEY: We'll hear from Steve Case and Gerald Levin about what a combined AOL-Time warner will mean.

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VARNEY: In tonight's "MONEYLINE Focus," that new media mega- deal. Described as a merger of equals, today's deal still values Time Warner stock at a hefty premium.

Earlier today, Willow and I spoke to the men behind this mammoth merger, and I began asking Time Warner's chief what his company's shareholders get aside from the premium.

(BEGIN VIDEOTAPE)

LEVIN: That wasn't the basis for this transaction. It was really accelerating the digital transformation of Time Warner, something that I've been looking to do for quite some time. And it was really a question of, you know, whether we should build and invest ourselves. In the conversations with Steve, it became clear that we could turbo charge the development of Time Warner. We could transform the company and accelerate returns for, really, both of our shareholders. So it became really apparent that there was a natural fit.

VARNEY: What your talking about is opportunity. That's what Time Warner gets to carry forward this digital revolution. It's opportunity that you've gone for here?

LEVIN: Well also, I think it's a very significant statement, I think, by us, by the company, by me personally, that validates the market capitalizations of Internet stocks, because it salutes the growth rate that really is going to come. And that's essentially what's happening here. You'll have a new currency, the AOL-Time Warner currency, that will be supercharged.

BAY: Steve, I know that you and Gerald Levin have worked very closely putting this deal together. But you're going to be chairman of a behemoth. How do you envision this partnership working in terms of day-to-day responsibilities? Are you going to be running Time Warner?

CASE: Oh, no. Gerry will be running Time Warner day to day. All the businesses were poured into him. The role I'm going to play is, I think, the role I can play best, certainly the one I enjoy the most, is really being a strategist, thinking about maybe what might be looming around the corners without having to burdened by what's happening today or this week or this month or this quarter.

And also some of the areas I really care about, in terms of building a medium we can be proud of, I'll be overseeing the policy initiatives, investing in new companies. I'll be overseeing the venture portfolio, the technology strategy. Our CTO of AOL will report directly to me. Those sorts of things that I really care about, trying to not just build the most valuable company, but also the most respected company.

VARNEY: Steve, just a few years ago you appeared with me on CNN, and at that time we spent most of the time discussing what exactly AOL does. A few short years later, you're now merging with the largest communications company in the world, and you're going to be the new chairman. Would you say this is a triumph for the new economy here?

CASE: Well, I guess to an extent. I think it's a triumph for both Time Warner and AOL. And what this really says is now it's time to take AOL and the Internet to the next step and really focus hard on accelerating the growth of broadband services, not just the access to them but also the kind of content you can create. And we do believe that having brands that people go to over time will be more and more important, and having those with multimedia content, so that really broadband-ready is going to be very important.

BAY: Steve, you mentioned broadband a moment ago. Obviously with this deal you get broadband access, but are you truly committed to equal access, as you have been, I know, lobbying quite hard for? Will you be sharing with, what are essentially now, your broadband lines with competitors?

CASE: Sure, now we believe in multiple broadband technology, so we'll continue to support other forms of distribution. Not every customer in the country will have a choice in terms of cable or DSL or satellite or wire. Some will only have one of them. So we want to support multiple technologies. Obviously, this positions us very well on the cable side, which has been a gap for us. It gives us a significant presence because Time Warner is right now the No. 1 cable system. When AT&T closes MediaOne, they'll be the No. 2 cable system.

But we do believe in the principle of competition and consumer choice, and we are pushing ahead with that. And actually I'm pleased that not just are we announcing a commitment to that today, but AT&T a month or do ago announced a similar commitment. So the whole cable industry, I think, is moving to that, and we hope other broadband platforms, whether it be wired or wireless, move to it as well so consumers get choice and ISPs compete.

VARNEY: We have a rather difficult question to ask of Mr. Levin in particular, and that is, what exactly is the role of Ted Turner going to be in the future of this company? Because it would seem from an outside perspective, it would seem that Mr. Turner's been eclipsed by this new economy company.

LEVIN: Ted is far more than just the vice chairman of this new company or the largest individual shareholder. It's his ideas that have really stimulated us, and he's very important, I think, to the people in our company. And you can see that today. And from my perspective, having an AOL-Time Warner with Steve Case and Ted Turner, that's the kind of depth and vision that I don't think you can see in any other company. And I think it's instructive that this is the first big deal of the new century.

CASE: I must add that Ted has always been a hero of mine, so it's really a great honor to be part of a management team that's going to take this AOL-Time Warner to the next step.

(END VIDEOTAPE)

VARNEY: There you have it -- Steve Case of AOL, Gerald Levin of Time Warner.

BAY: New team at the top of the new AOL-Time Warner. And as such, our bosses.

VARNEY: Well said.

BAY: Just ahead, some of the day's other news, including Microsoft resolves one long-running legal conflict.

VARNEY: But takes a hit from the highest court in the land.

We'll be back.

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VARNEY: Microsoft said it settled an antitrust case brought by Caldera. Terms of the deal not released. But Microsoft says it'll take a three cent charge against earnings. Caldera sued for $1 billion in 1996, charging Microsoft with anti-competitive practices.

Separately today, Microsoft received a legal blow from the U.S. Supreme Court over its temporary workers. The high court let stand an appellate ruling that could allow some 10,000 past and present workers to sue Microsoft over its stock option plan. Microsoft said it was disappointed in the Supreme Court decision.

BAY: Another challenge to Microsoft today when IBM came out with a major vote of confidence for the Linux operating system. Big Blue saying that Linux, a small but fast-growing rival to Microsoft Windows, will now be made available on IBM-server computers. The move part of IBM's effort to revitalize its server business. IBM stock surged, gaining nearly five. Checking some Linux-related stocks, Red Hat rocketed $9, but VA Linux fell 1 5/8 and Corel up nearly 75 cents.

VARNEY: In other developments, Next Link Communications says it's buying Internet access provider Concentric Network. It will pay nearly $3 billion. It will become the latest telephone operator to get into the high-speed data market.

BAY: Now for the dark side of the new economy and the potential danger for online shoppers. A computer hacker got access to the files of CD Universe and demanded that the online music retailer cough up $100,000. The company, which is owned by E-Universe, refused to be blackmailed. The hacker, who claimed in an e-mail to "The New York Times" to be a 19-year-old Russian, posted a reported 25,000 credit card numbers on a Web site. The site was shut down, and the FBI is investigating what appears to be a case of global Internet crime. CD Universe said it would do everything reasonable to minimize the damage. We'll have more on this story tomorrow.

VARNEY: And up next, "Ahead of the Curve"...

BAY: ... some of what you need to know tonight before the markets open tomorrow.

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VARNEY: After today's mega-merger and Wall Street rally, investors will need something to hang their hat on tomorrow and it could be earnings. Quarterly reports from Yahoo!, Seagate Technology and the Dow component International Paper, they're all due out tomorrow.

Also, watch Compuware, up more than $5 in after-hours trading. Late today, the software firm said third-quarter earnings will beat or meet estimates.

And Applied Micro Circuits up 4 1/2 in late trading after the bell. It beat third-quarter estimates by two cents a share.

That's MONEYLINE for this Monday. I'm Stuart Varney.

BAY: And me, I'm Willow Bay.

Thanks for joining us. Good night from New York.

Next, "CROSSFIRE," with this question: Does everyone think the AOL-Time Warner deal is such a good one?

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