Creating an Entertainment Giant : INVESTORS : Stockholders Accede to Merger Plan

With formal board approval of the proposed merger between Time Warner Inc. and Turner Broadcasting System Inc., Time Warner investors who had worried about dilution of their stock seemed resigned to the deal Friday and tried to put a positive spin on it.

“I know enough to know that there’s dilution upfront, but also that there are some very exciting opportunities to grow these businesses together, and my guess at this point is to say the opportunities are enough to outweigh the near-term dilution,” said Morris Mark, president of New York-based Mark Asset Management Corp., which holds more than 500,000 Time Warner shares.

When the deal was first announced about a month ago investors expressed concern about the effect on Time Warner’s stock, which has been a poor performer since the 1989 merger of Time and Warner Communications.

By issuing up to 178 million new shares to acquire Turner--adding to 386 million shares already outstanding--Time Warner in effect dilutes current shareholders’ stake in the company and their share of future earnings.

On Friday, some investors noted that the market has already pushed the stock lower to reflect the dilution. Since merger speculation began in August, Time Warner stock has dropped $5 from its 1995 high of $45.625 on Aug. 16.

On Friday, the stock rose 87.5 cents to close at $40.625 on the New York Stock Exchange.

Some Time Warner investors openly worry about how long it will take to see a payoff from the merger reflected in earnings and in the stock price.

“There’s no argument that on a theoretical basis, or over the long term, this acquisition makes sense,” said Guru Baliga, portfolio manager for IDS Advisory Group, a pension management group of American Express Financial Corp. in Minneapolis.

“The problem in this business is that no one has a long-term horizon. We can’t wait five years for the stock to do well,” he said.

In particular, the merger appears likely to delay the restructuring of debt-burdened Time Warner that many shareholders have been awaiting, he added.

“I’m confused, basically,” said the manager of one mutual fund with large Time Warner holdings, who spoke on condition of anonymity. While the merger does dilute the stock, “what we’re left with is a faster-growing company with a couple of new major shareholders who . . . will work hard to make their own net worth grow. I’ll still hold on to my stock.”

Investor Mario Gabelli, speaking on CNBC on Friday, downplayed the potential negatives of the deal. “Jerry Levin has demonstrated his global statesmanship, and he has a vision of the future,” Gabelli said. “I think this is a very, very powerful collection of assets for the global marketplace of the 21st Century.”

Brian Grove, vice president and portfolio manager for John Hancock funds that hold more than 3% of Time Warner’s stock, agreed. “As a long-term investor . . . it looks like a good deal,” he said. Among other things, the deal means stronger cash flow for the combined companies.

“People have been very patient with the stock . . . waiting for something to happen,” Grove said. “Now the something has happened, and it better work.”