LEVIN: Yes, I think that was the toughest thing to get your arms around and also the thing I'm most pleased about. I think in the technology of M&A, the metrics that you arrive at are usually the standard banker convention where you do a relative take on two stocks and you take a certain period, then you adjust for other factors.

Here, if you look at the last 12 months, the AOL stock, you would have had a much more favorable ratio for AOL. If you went back three years, it would have been in Time Warner's favor by a factor of 9:1. So what that tells you is the AOL stock is not seasoned in a conventional sense, but if you stop there, you wouldn't get anywhere.

So what you have to do is then turn around and say what's the right result for the shareholders in terms of participating going forward in the benefits that will come to each side that couldn't have been derived alone? And in that calculation, I looked very hard at the last six months, the last 18 months. I also looked at some projection as to what might happen to the AOL stock and to the Time Warner stock with a certain exchange ratio and then I got very fixed on an exchange ratio.

And there is kind of a bid-and-ask where AOL wanted to try and keep the support under the AOL stock but at the same time still recognize that the Time Warner stock was undervalued.

Undervalued in the sense of its relationship to an Internet complex, that is to say, okay, Time Warner may actually be worth something if it's on its own, but if you connect it to something, it's worth more. I finally got my arms around it over the millennial holiday, waiting for the Time issue to come out on that Monday, but watching 100 hours on CNN. It actually came into mind and said "I think this is the right number", and it happened to be 1.5, and that's assuming we're working out all the other things, I'm going to put that in front of Steve and Ken Novack and saying this is not a negotiation, high-low, I think that's the right number.

I think it's the right number for the AOL shareholders and for the Time Warner shareholder. And the proof of that will be if in the end some people think that AOL has been sold at too much of a discount or Time Warner has been sold at not a high enough premium. If we get those disparate reactions, then we've probably done the right thing.

CASE: What we got, I think yesterday, was about what we expected. There were some people who were criticizing me for paying such a big premium for Time Warner, saying at the close on Friday, AOL if you look at the combined market cap was 65 percent of the Time Warner, 35 percent of it. And others were critical of Jerry saying, well, if you look at the cashflow, 80 percent of the cashflow is coming from Time Warner, only 20 percent is from AOL, and we just needed to come up with something that we were both comfortable with. The bottom line is I became convinced that AOL shareholders were better off owning 55 percent of AOL-Time Warner than 100 percent of AOL, and similar on Jerry's side, that Time Warner shareholders were better off owning 45 percent of AOL-Time Warner than 100 percent because of the strategic opportunities, but also to address some of the strategic challenges.

The real question for AOL was about broadband. People were focused on access, but they were focusing way too much on access. The next thing they should have focused on was, okay, if you get the access how's the service going to sing? On Time Warner, there's all these wonderful assets, but it's sort of missing in action in the Internet. If it was an Internet company and had Yahoo's multiple -- you know.

LEVIN: Let's go back to a fundamental valuation concept. It's really about discounting future cashflows. So one profound thing that's taken place here is that I am acknowledging certain Internet valuations, at least as applied to a company like AOL is actually a fair valuation. It's not crazy.

So if I accept that, that's a very important premise, then I also -- now putting an AOL shareholder's hat on -- have to accept that in fact, these Time Warner properties are very valuable and all I'm doing by putting it together is I'm accelerating the time when that value can be realized and so there should be something, some recognition of that so that the Time Warner shareholders get this acceleration and hence someone calls that a premium. But in fact, that is all it is.

And basically since this is a merger of equals, it is trying to get the numbers straight so that you give the Time Warner shareholders this acceleration and you validate the AOL valuation and you pretty much come up with, it's somewhere in the zone of 50-50, although there's 55-45, is just the way it ends up based on the current number of shares that are out there.

CASE: But there is a problem here. The thing I was most worried about as we were thinking of this the last few months is the AOL stock would run up. It sounds bizarre, but basically I recognize that from Time Warner's perspective of a merger of equals was an important concept and something, 50-50 or close to 50-50 was going to be important, and our stock, like all Internet stocks are, is very volatile.

Last spring, we had a market value of $200 billion. Everyone thought we could do no wrong, and then within six months, it had dropped to $100 billion and everybody thought Microsoft was going to offer free access and kill us. Then it went back up. And so, it's very volatile. You have to kind of look beyond that, and as we were looking at things in the last couple of months and particularly in the last couple of weeks, our stock had come down a little bit, which was actually helpful in getting to a common ground where Jerry could feel like he had done the right thing for his shareholders in getting something that is close to 50-50 and I could feel that I was doing the right thing for AOL shareholders without looking like I was paying too much of a premium, even though I wasn't particularly focused on that because the volatility of our stock could make that premium bounce up and down so dramatically in very short periods of time.

LEVIN: If you go back to the Time Warner merger which was a merger of equals and a stock for stock transaction until Marvin Davis came by, then the Warner shareholders owned a greater percentage than the Time, Inc. shareholders.

Q: This is the flip side, though, Jerry, of the discounted cashflow argument, that AOL has been enjoying a cashflow growth rate of around 50 percent, Time Warner 15 percent, so the combined company by my bad math is around 27 percent. So those are really slowing down the Internet possibility or the Internet valuation possibilities. The Wall Street valuator went out with the ... and said gee, we had this thing that was growing at 50 percent. I had to slow down my view of it.

LEVIN: First of all, let's put PE's aside. This is going to be a cashflow company. Twenty-seven percent -- let's choose that pro forma. So that's a pro forma revenue growth number. The juice in this company is going to come from the cashflow growth, because, and I'll go back to my statement of the original formula: Once you have these amortized streams and we used the number yesterday that we have 100 million subscribers across the company, and you go through all those, but if you're contributing some of them, the cashflow margin, on the margin, of incremental revenues, if we're smart enough to figure it out, we sure as hell ought to be, is somewhere in the 70 or 80 percent, which is basically the cable business, too.

And so that means that you get the turbocharges on what we call the EBITDA or the cashflow, and I believe strongly that we can justify the valuations because of that kind of growth rate. Even putting the billion dollars out there right away, even in advance of the transition team doing all of its stuff.

So I think we're somewhat beguiled here by the fact -- and maybe this transaction will help it. The Internet valuations seem -- someone is trying to find a metric that will satisfy it. So it's a multiple of revenues or it's aggregate value to revenues, that ratio, when in fact, I actually came back in my own mind with respect to AOL and did a per-sub valuation. What are these subs really worth going forward? And I got very comfortable.

Now let me go back to the ratio.

If you come to this and you're a doubter and you're a Time Warner shareholder, and you think what happened in AOL stock last summer, hey, that's the real value? Then this is a merger of equals, it's 50-50 and the exchange ratio worked.

If, however, you think that the 200 billion is the real value, then you'll get Time Warner up to a level that's pretty close to that. That to me is the elegance of this. Well, I can tell you, I thought long and hard about it. And as I say, I'm satisfied that we've made a breakthrough here, because what would have prevented a deal like this from happening before, put the social issues aside just for a moment? It's really how can you possibly bridge the valuation gap?

CASE: AOL, interestingly, some people joke, is sort of the widows and orphans play in the Internet space because you look at our company, our earnings, it is a whole class different than the other Internet companies. In fact, you probably could add all the Internet companies together and we would have more revenues and more earnings. So it is actually valued at a multiple of earnings much, much less -- a multiple of revenue -- much, much less than the Internet space.

So we're already kind of somewhere in the middle between them and now, on a pro forma basis, you're right, it goes to kind of a 30-ish multiple which is compared to other companies pretty moderate, and the question is are we able to execute a strategy that really captures some of these opportunities, not just on some of the revenue figures, but whole new businesses we can create and positions more and more of an Internet company.

Q: So how do you take that pro forma? The 30-some pro forma? What will you see, if you do things right? Where does it go?

CASE: I'm not going to put a number on the table. But obviously, this is viewed as an Internet company. There's a huge upside. And I think this notion of here are Internet companies and here are media companies is not going to be the way it's looked at five years from now. They are blurring together. Ultimately, they are the same in that from a consumer standpoint, there are ways you get information and ways you communicate, ways you buy products, the way you've learned things, the way you're going to entertain. That's the way consumers look at it, and I'm proud to say, the last five years, it went from 1 million AOL members to 20 million members, and I'm proud to say that in the last five years, people have used it, it went from an hour a week to an hour a day.

But it's never lost on me that an hour a day is nothing compared to the time they spend watching television, listening to music, reading books, reading magazines. This is the real world, and we want to basically have an impact on the real world, and in the real world people are more and more excited about the Internet, more and more excited about the possibilities, feel more and more empowered. There is more and more diversity of choices, with millions of Websites and so forth.

But although they are spending more and more of their life on the Internet and will now take it from the PC to the television and from the television to pocket devices and data phones and so forth, they still are going to watch television, they still are going to read books. I'm proud to report they're still going to read magazines, Time Magazine and Sports Illustrated and Fortune and so forth and the ability, and the recognition of that and the ability to take some of these traditions into this new world and take some of our new world thinking in terms of how to build a sense of community, to apply those lessons to some of the Time Warner properties where it makes sense and for us to learn some of the lessons that have been honed over -- even though Jerry says the company is only 10 years old and we are an older company, which I guess -- I don't know what exactly that means, but it seems like a nice thing for him to say. I know that the tradition of this company is not a tradition of 10 years, it's a tradition of Henry Luce, 75 or 80 years, and we're pretty smart people, we're pretty adaptable people, but there is nothing like the school of hard knocks, and we think it's great that there's a company that's built this kind of tradition.

LEVIN: And actually, Little, Brown started in 1839. It was helpful -- AOL makes money, has a profitable formula, has real management, real good board and therefore is like a blue chip company in the Internet space. It's very helpful to our thinking and certainly to our board's thinking.