From Chris on the FOOL
I'm cross-posting this from the AOL board (http://fireboards.fool.com/Message.asp?mid=17048184).
Press Release from January 10, 2000: AOL and Time Warner announced “a strategic merger of equals to create the world's first fully integrated media and communications company for the Internet Century in an all-stock combination valued at $350 billion.”
Today, that combined company is worth $85 billion.
Holy Smokes! How does a merger between two companies end up with a loss of $265 billion in shareholder value in just 27 months?
Is the sum of the parts really less than the whole? The whole idea was that this was going to become a monstrously powerful internet/media swiss-army-knife of a company. And as far as I can tell, it is monstrously powerful, isn't it?
Was this just a big mistake? And if so, AOL's or TWX's? I've heard both sides of the argument, and I have to lean towards AOL because they had growing earnings and TWX had growing debt. But even with the debt, you have to think that all of the media properties have enormous value: CNN, HBO, Time, etc. At least the Cable business had to be worth something, right? Wasn't that one of the main selling points? AOL was going to have access to Time-Warner's Cable system and thus high-speed internet access?
Can we really attribute this to a fall in advertising revenue? I don't think so. Was the future value of the advertising really worth $265 billion?
Or is this all part of the deflation the internet equity bubble? I suspect this has a lot to do with it. In 2000, AOL had a Free-Cash-Flow of $1.3 billion or $0.53 per share according to this document:
aoltimewarner.com
That gives us a P/E ratio of 139 for the opening price of $74 on January 10, 2000 (the day of the big announcement) and the earnings for CY 2000. Remember how reasonable that sounded at the time?
How much further will it go before it hits bottom? I have no idea. My crystal ball broke right before I bought Global Crossing at $49 per share. Thanks for the tip, George Gilder.
This is probably one of the most polarized places to ask all these questions, but that won't stop me. It seems that I can find many people on this board who will tell me that it's because “AOL sucks” or that “Time Warner Sucks”. Generally, I don't find sucking to be an adequate explanation; and besides, the SEC doesn't recognize sucking as an allowable accounting standard (does it?).
Likewise, I can find just about as many people here that will tell me that AOL really should be valued much higher than it is now, but that the markets just aren't realizing its full value. That explanation leaves me just as unsatisfied. Is the market just not seeing the $265 billion that is hidden under the AOL mattress? I don't think so.
I'm not trying to flame the board. Really, I'm trying to figure out why something like this happens and how to recognize it in the future before it happens again. So I will gladly listen to any and all reasonable explanations of why $265 billion dollars in shareholder value disappeared.
Thank you very much for your time.
Chris McAdams (no position in AOL currently or in the past) |
