Shares of America Online Inc. fell more than 11 percent today, one day after the Internet pioneer announced a record $183 billion deal to buy media conglomerate Time Warner Inc., depleting the value of the very currency AOL intends to use to leap from cyberspace into the real world.

AOL wants to be king of the media world--"new media" is passe in the eyes of chief executive Steve Case. But analysts said the reaction of investors--AOL's shares have sunk about 14 percent since the deal was unveiled--demonstrates the dangers that lurk as a new breed of entrepreneurs attempts to build a bridge to the Internet world.

"Most people view Net companies as having an infinite horizon," said Ned Riley, chief investment strategist at State Street Global Advisors, which is one of the biggest owners of both AOL and Time Warner stock. "The new company is supposed to have a growth rate of 30 percent a year. That's great for a mundane media company but mediocre for an Internet company."

Since AOL went public eight years ago, its shares have surged more than 50,000 percent, riding the giddiness over companies that would lead the way as the economy evolved into one pegged to the Internet. AOL's revenue has more than doubled annually over the past five years, while Time Warner's inched up about 16 percent a year.

Since AOL is paying entirely in stock--and assuming about $17 billion in debt--the decline in the value of AOL's shares also could hurt Time Warner shareholders, who will be paid 1.5 AOL shares for each of their current shares.

At Friday's closing prices, that ratio valued Time Warner at $110.60 a share. AOL's close of $64.50 a share today would fetch only $96.75 for Time Warner shareholders--knocking $21 billion off the total value of the deal in less than 48 hours.

Time Warner shares fell 5.5 percent today, to close at $85, after rising about 40 percent Monday.

AOL and Time Warner executives say they expect the combined company to have $40 billion in revenue in its first year. About 20 percent of the revenue would be derived from AOL.

The bull market has been driven as people threw money at stocks that had the most potential to grow the fastest, often paying very little attention to the underlying fundamentals of the company.

So the arithmetic that dampened AOL's stock price today was simple. Before, 100 percent of AOL was growing at 50 percent a year. "Now, 20 percent will grow 50 percent a year and the other 80 percent will grow in the teens," said Bill Burnham, an analyst at Softbank Partners, the U.S. division of the Japanese conglomerate that has invested in several Internet companies, including Yahoo.

"I don't care if you scream at the top of your lungs," Burnham said, "you're not going to get people to pay high values anymore."

The decline, much of it apparently due to the reactions of individual investors, may have reflected not only concern about the deal but also a certain disappointment in AOL's change of identity. The stock has been a favorite of people who a piece of the high-flying Internet--but a safe one.

AOL, unlike many dot-com stocks, has managed to build a solid earnings foundation while still carrying the aura of a realm many consider risky. Investors could live a bit on the wild side, but respectably. By joining up with Time Warner, AOL may have become, for some, no longer exciting.

That attitude pervaded Internet chat rooms today, as many investors lamented the deal.

"Not loving my AOL today," wrote one investor who also wondered who would vote to cut a company's growth in half and assume a huge debt load.

In about two-thirds of all acquisitions, the acquirers' stock price falls the day after a deal is announced, said Mark L. Sirower, an analyst at Boston Consulting Group.

"Investors are generally skeptical that the buyers will be able to maintain the value of the businesses and achieve the synergies to justify the premiums," he said.

Case and Time Warner chief executive Gerald M. Levin said in an interview Monday that together they will be able to grow faster, and deliver more solid profit, than any Internet company. "Valuation is just the question of the week," Case said. "We're the company of the new century."

Time Warner, he noted, will give AOL a raft of venerable brand names, including People, Sports Illustrated and Money magazines. And AOL will finally get what it has needed most--crucial high-speed Internet access, in this case over cable lines.

"To say that this is the demise of us as an Internet company is naive," he said.

Most of today's trading of AOL stock was by individual investors--there were more trades and the average size of the trades was smaller--while Time Warner shares appeared to be traded mostly by large, institutional investors.

It's not surprising that the companies would prompt such different reactions on Wall Street, given their corporate histories.

Time Warner, which dates back to the establishment of Time magazine 78 years ago, is a product of the debt-driven merger and acquisition craze of the 1980s. AOL, just 15 years old, continues a two-year trend of using bull-market-plumped stock values to make purchases.

Ten years ago, when Time bought Warner Communications for the then-staggering price of $15 billion, it had to finance the deal with a load of debt that flattened its stock price for six years and still costs the company more than $1 billion in annual interest payments.

Over the past two years, as the bull market has lifted the stock prices of some companies to stratospheric levels, many companies have financed their deals by simply giving stock to shareholders of the target companies. According to Securities Data Corp., $1.5 trillion worth of stock was used for acquisitions last year--twice the 1997 total and more than four times the value of cash deals. In 1991, stock and cash were used in virtually equal proportions.

In 1988, in fact, fewer than 2 percent of large deals were paid for entirely in stock. By 1998, that number had risen to 50 percent, according to Mark L. Sirower, an analyst at Boston Consulting Group, who co-authored a report on the topic recently for Harvard Business Review.

This trend will surely continue, Sirower predicted. But access to that capital depends on the continued optimism of investors about the profits that these computer entrepreneurs will someday earn. So, as more Internet companies inevitably charge back to the past to grab bricks-and-mortar assets, their stock values are bound to be tested.

"A lot of Net start-ups are saying 'How can I get me a piece of something real?' " said Burnham. "But the more complicated these companies get, the harder it gets for Wall Street to value these companies."

At the Top

Three of the 10 biggest mergers ever proposed have involved local companies. All were primarily stock deals, some with assumed debt.

Acquiror

Target

Date announced

Ranked value of deal (in billions)

America Online Inc. (Dulles)

Time Warner

Jan. 10, '00

$183.0

Vodafone AirTouch PLC

Mannesmann AG

Nov. 14, '99

148.6

MCI WorldCom* (D.C.)

Sprint Corp.

Oct. 5, '99

127.3

Pfizer Inc.

Warner-Lambert Co.

Nov. 4, '99

87.9

Exxon Corp.

Mobil Corp. (Fairfax)

Nov. 30, '99**

86.4

American Home Products Corp.

Warner-Lambert Co.

Nov. 4, '99

76.1

Travelers Group Inc.

Citicorp

Oct. 8, '98**

72.6

SBC Communications Inc.

Ameritech Corp.

Oct. 8, '99**

72.4

Bell Atlantic Corp.

GTE Corp.

July 28, '98

71.3

AT&T Corp.

Tele-Communications Inc.

March 9, '99**

69.9

*MCI was based in the District before it merged with WorldCom.

**Date deal was finalized; others are date of announcement for pending deals.

SOURCE: Thomson Financial Securities Data