America Online Inc., the upstart Internet provider that just a few years ago was battling to survive, said today that it would buy giant Time Warner Inc., in a mammoth $183 billion deal that changes the media and entertainment landscape and demonstrates the power of the paper wealth fueling the electronic revolution.

The all-stock transaction--the biggest merger in history--is the first of what is expected to be a new wave of mega-marriages of necessity between Internet companies and traditional media firms. The Internet needs content to survive; controllers of magazines, books, music and television have been vying to capture a larger audience via personal computers.

"I've been saying that this will be the Internet Century," America Online chief executive Steve Case said in an interview after a mobbed news conference in Manhattan today. "We are going to be the global company for the Internet age."

Case, the boyish marketing whiz who initiated the deal a few months ago, will be chairman of the new company, called AOL Time Warner. Time Warner chief Gerald M. Levin will run the company as chief executive.

The companies overlap little in terms of their current businesses, so most analysts expect the deal to be easily approved by antitrust regulators. But it remains to be seen how smoothly the companies can blend.

Even Case and Levin acknowledged that they spent most of their negotiating time discussing their cultures and ironing out internal "social issues," but Levin said they concluded it will be a company of "hugs and high-fives."

The combined company will have about 82,000 employees, 12,000 of them from AOL.

Dulles-based AOL was among the first of a brash new breed of electronic firms led by computer geeks. Time Warner, the largest media company in the world, is a 75-year-old publishing powerhouse that has mushroomed in recent years through a series of mergers, including the recent inclusion of Ted Turner's Turner Broadcasting System Inc. and its watershed 1990 Warner Communications acquisition. It owns Time, People and Sports Illustrated magazines, as well as HBO and cable companies.

AOL has only one-fifth the revenue of Time Warner--AOL didn't even make the Fortune 500 last year--but has four times as much profit and thus is valued much higher by Wall Street. In the past quarter, AOL's revenue rose 46 percent, compared with just 2 percent growth at Time Warner. So while AOL's stock doubled in the past year, shares of Time Warner have gone up a modest 17 percent.

Under the terms of the deal, AOL valued Time Warner's shares at about $110.60, an astonishing 70 percent premium over Friday's closing price. Shares of Time Warner today jumped $25.25, to $90, suggesting Wall Street was hedging its bets over whether the merger would actually take place or that AOL's stock price would stay high enough to keep that premium. AOL slipped $2.18 3/4, to $71.25.

AOL is paying about $166 billion in stock for Time Warner and will also assume about $17 billion in Time Warner debt.

That load of debt is a legacy of the 1990 Time-Warner Communications deal. For the 12 months ended last Sept. 30, Time Warner paid out $1.3 billion in interest on the debt left over from the deal, back in the bygone era when mergers were paid with debt rather than the wampum of today: highly valued stock.

So, while some people were wondering today why Time Warner was selling out to relatively tiny AOL, others were wondering why AOL, with a stock price-to-earnings ratio of 217, would laden itself with an old-time slow-growth business.

"What's the AOL shareholder getting out of this?" asked Richard MacDonald, a media analyst at J.P. Morgan Securities. "And are they going to value the company the way AOL is valued? In other words, is it old media becoming new media or new media becoming bricks and mortar?"

The potential clash of powers was evident in the sheer number of people who took turns talking at the news conference to announce the deal. Case and Levin were followed by four other "suits," including AOL President Bob Pittman and Ted Turner, who is vice chairman of the new corporation.

"There are a lot of cooks on stage," Case noted, "but there is a big meal to serve."

Turner, who owns 107 million shares--derived mainly from a sale of CNN to Time Warner--said voting on the deal was a no-brainer. If it goes through, he makes $4.9 billion. "I did it as enthusiastically as when I first made love some 42 years ago," he said at the news conference, forcing some nervous laughter.

AOL Time Warner will be based in New York, but the America Online division--and Case--will remain in Dulles. Pittman, a former Time Warner executive, will continue to split his time between the two cities. Case said downsizing of Dulles' 3,000-strong staff is "highly unlikely" and that the deal will, in fact, "turbocharge" Washington's high-tech corridor.

Analysts were quick to applaud the deal for impeccably complementing each other's businesses--achieving what many have tried, and failed, before. Disney's Go.com unit, for instance, was created when Infoseek Corp. and Disney's Buena Vista Internet Group merged but has not created anything significant, said analysts.

This deal "sets the bar in defining the media company of the 21st century. It will do away with the definition of new media," said Paul Noglows, managing director of the Internet media group at Chase H&Q.

"This merger is not a destination; it's the start of the next level of consolidation," said Jagdish Sheth, a marketing professor at Emory's Goizueta Business School who consults on the future of broadband services, which is high-speed Internet access. "Now, CBS and Viacom will be forced to make a move. This will have a big impact on AT&T's plans on cable and the Internet."

But some skeptics raised concerns about the increasing consolidation of the media industry.

"This is bad news, because in deal after deal, fewer and fewer companies are dominating media and communications," lamented Robert McChesney, a professor of communications at the University of Illinois who explores this phenomenon in his new book "Rich Media, Poor Democracy." "They are contradicting the notion of free press. What we're seeing is our entire life subjected to intense commercial scrutiny."

The move comes at a time when AOL as an Internet service provider is facing unprecedented competition from the string of free services--offered by such industry leaders as Yahoo Inc., Excite At Home and Juno Online Services Inc.--that have been announced in the past two months. AOL and its competitors charge monthly subscriber fees of about $20 a month.

By spreading its tentacles into content and taking on the Time brand name, AOL will likely be able to vastly expand its global reach. Already, with 22 million subscribers, it has more than seven times as many accounts as the next largest online service.

Time Warner brings old world stability to the tempestuous world of the Internet. It also offers its cable network--which reaches 20 percent of American households--and its vast editorial content ranging from CNN to People. AOL brings its technical expertise.

AOL's annual revenue of $5.2 billion may pale next to Time Warner's $23 billion, but in the Internet age, that is not the final arbiter of a company's worth. In the last year, AOL's stock value has nearly doubled, giving it a market capitalization that is nearly double that of Time Warner.

"This new world of valuations in the Internet economy is something I accept," Levin said.

"It indicates that the Internet revolution is not just revolution of the markets," said David Toung of Argus Research. "It's being translated into the real thing as there are marriages between traditional and new media."

Time Warner, which has stumbled in its efforts to create an Internet presence, overnight becomes a new media company. "Strategically for both companies, this is five out of five," MacDonald said. "Ignoring valuation, Time Warner gets AOL brand, reaches all those subscribers, all those kids. Strategically, it's a home run."

One of the areas that Levin emphasized was the music division, which is the second largest in the world with $600 million in revenue--10 percent of Time Warner's business. Its book-of-the-month club could also vastly benefit.

"People will be able to download music clips, specific songs, bypassing radio," Toung said.

He also noted that the deal may be a boon for advertisers, who would be able to go to one source to hit every media window. Harry J. Pearce, vice chairman of General Motors Corp., for example, said the merger could give GM more media outlets in which to sell.

Analysts say the hybrid Internet-media company is likely to have a broad impact on a range of industries from online content and e-commerce to magazine publishing and even music and raises the stakes in the consolidation scramble in the media industry.

The merger signals that the differentiating factor between services has changed from perceived reliability--getting access to clear phone lines, services without software bugs--and cost to content.

One of the first priorities of the merged company, Case said, will be to use Time Warner's extensive network of cable to deliver high-speed access to AOL users. In recent months, AOL's broadband strategy had been widely criticized as a weak point of the company. Its competitors in the Internet access business, EarthLink Networks Inc. and Excite At Home had already been aggressively moving to lease cable lines for their customers. But the pending merger puts AOL significantly ahead of the pack, analysts said.

AOL is already planning to use high-speed connections to stream in Time Warner's CNN broadcasts through the AOL service and hopes to develop a new online presence with the media company's other products.

Some analysts characterized the merger as a surrender flag from Time Warner--an acknowledgment that the company was not capable of moving to the Internet world alone.

Case said that he got to know Levin intimately over the past year, a relationship that was intensified during a week-long conference in China in September. In mid-October, Case said he called Levin and suggested that they combine the companies--with Levin as chief executive.

"I wanted to concentrate on my family," said Case, who has five children, ages 4 through 12. Levin, 60, has four grown children (a son, a New York City teacher, was murdered in 1997 by a student).

Levin said he literally "took a walk through the woods"--near his home in Vermont. Then, he called Case back and invited him to dinner in Manhattan. Holded up in a hotel room, they began serious discussions about the plan--code named Alpha Tango (the A for AOL, the T for Time Warner).

This Thursday, over dinner at Case's Northern Virginia home, they shook hands. Speed was essential, they believed, to keep word of the deal from leaking to the markets.

By 2 a.m. Friday, lawyers and investment bankers all over New York were being awakened by telephone calls. By 7 a.m., the Time Warner team was at its headquarters, meeting there throughout the day. Key players in the negotiations were Richard J. Bressler, Time Warner's executive vice president, and Kenneth J. Novack, vice chairman of AOL.

In the 30th floor conference center at Simpson, Thacher & Bartlett's offices on Lexington Avenue, the team of lawyers, investment bankers and AOL executives worked on. The kitchen staff stayed to prepare meals so no one, not even delivery people, would have to come in.

Secretaries typing legal documents weren't told the names of the two companies. Code names for the individual companies were "Black" for AOL and "Blue" for Time Warner.

Once the valuations for each company were decided, most of the legalities worked out, management and board makeup in place, the boards of each company voted for the merger at about 9 p.m. Sunday.

After a Time Warner board meeting that lasted about eight hours, Levin placed a conference call to Case and the board members congratulated one another. But the exhausted negotiators didn't even take time for a celebration. Some stayed behind and were up again all Sunday night to finalize details. Others simply went home to sleep.

"There was champagne standing by," said one participant. "But by the time it was over, everyone just headed for the door."

Staff writer Sharon Walsh contributed to this report.

The New Company

A merged AOL Time Warner would integrate the most popular Internet service with some of the best-known media, news and entertainment brands:

Chairman: Steve Case (now AOL's chairman and chief executive)

Chief executive: Gerald Levin (Time Warner's chairman and chief executive)

Vice chairman: Ted Turner (Time Warner's vice chairman)

Co-chief operating officers:

Richard Parsons (Time Warner president)

Bob Pittman ( AOL president and chief operating officer)

Board

16 members

(eight appointed by each of the current AOL and Time Warner boards.)

What the marriage combines:

Time Warner

*Time

*Sports Illustrated

*People

*Fortune

*Warner Bros.

*CNN

*HBO

*TBS

*TNT

*Cartoon Network

*Warner Music Group *WB Network

AOL

*Netscape

*CompuServe

*ICQ

*AOL Instant Messenger

*AOL Movie Fone

*Digital City

Corporate headquarters: New York

Employees: 82,000

Revenue: $30 billion

SOURCE: The companies, Bloomberg News

CAPTION: America Online's Steve Case, Time Warner's Gerald Levin and Ted Turner applaud remarks by AOL President Bob Pittman at yesterday's announcement of the merger of AOL and Time Warner.