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Technology Stocks : Internet Analysis - Discussion
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To: Chuzzlewit who wrote (410)3/6/2000 12:35:00 PM
From: kjhwang  Read Replies (1) of 419
 
I agree that an immediate change in aol occurred subsequent to the announcement of the merger. However, I believe that this change and the increased beta associated therewith (and hence the decline in equity values) is a temporary blip due to uncertainties in corporate compatibility, realization of synergies, how to value the combined entity, etc.

I find it difficult to believe that the entity wacc will either permanently increase to a value larger than aol's 19.17% or decrease to a value smaller than twx's 13%, due to the contributions of twx's steady and mostly predictable income from operations and the unpredictability of aol's scaleability and sources of future cash flow. Thus, using the pre-merger wacc would underestimate the intrinsic value of the merged entity.

Perhaps a conservative approach is to use a large wacc (say 22%) for year 1 and subsequently scale to the mean value (~15%) by year 10. However, by doing so, it is clear that value is destroyed unless appreciable synergies result -- a conclusion I am uncomfortable with if we assume that aol acts as a holding company (e.g. Berkshire Hathaway) with twx operating separately and independently.

I am just trying to grapple with an approach to value this entity using incomplete information.

Thanks for your thoughts,

tci

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