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Technology Stocks : America On-Line: will it survive ...?
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To: Bharat Bhatia who wrote (623)11/17/1996 8:32:00 PM
From: Harry Larson   of 13594
 
Hard to see how AOL could do a secondary now

Bharat,

>>Pretty soon there will be an equity offering to meet cash needs

Hard to see how AOL could do a secondary now without suffering
massive, unaceptable, dilution (on top of the 80% incurred since
1994. Not to mention that 7.8m shares issued for acquisitions
have since 10/10 become eligible for registration and sale. (as
noted in 10/10 424b filing of 580K shares).

At the current $27, AOL's selling for 10.7 times cash plus
shareholder equity.

Cash+SE is only $2.53 per fully diluted share (after the charge
for deferred acquisition costs). Of that, cash is just $0.92
($102m), receivables $0.74 ($82m), plant/equipment $0.98 ($109m),
and working capital is in the hole $0.47/share (-$52m). The
value of the major intangible, the subscriber base, has eroded
as magnitude of churn and its cost have become apparent. Q1's
$356 marketing expense per net new sub means nearly 18 months to
breakeven at AOL's new standard fee of $19.95. Indeed, the most
sizeable `asset' may be the $700m of tax loss carry-forwards,
worth $280m at a 40% rate.

The CFO warned that Q2 and Q3 would be `transitional' and
bummers. It wouldn't take much of a general market downturn for
many AOL holders to decide they'd rather not wait around for
evidence that the promise of `the new AOL' will be realized.
Then there's all the tax loss selling waiting just in the
wings.
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