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To: kjhwang who wrote (411)	3/6/2000 1:35:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 419

Tci, The wisdom of the merger really comes down to your belief that AOL did its homework in calculating potential synergies. Ultimately, that will depend on several subsidiary items including the melding of corporate cultures, the realization of potential cost-savings, and the ability to cross-sell products. Unfortunately, many friendly mergers have an unhappy outcome for holders of the acquiring company because of promises made to retain entrenched management that is at odds with the management philosophy of the acquirer. Relatively few companies are able to pull off really successful mergers. But there are some notable exceptions. Look at TYC as an example. Also, the merger of Vodaphone with Airtouch and VOD's subsequent purchase of Mannesmann have been met with investor enthusiasm. The fact that the combined market capitalization of AOL and TWX have declined following the merger announcement argues that investors are not so sanguine about the prospects for the combination. ** There is an additional problem with betas that I didn't mention -- the tendency for betas to converge towards 1.00 as a company gets larger and cash flows become better defined. ** Maybe the best way to approach the valuation issue is to assume an appropriate risk-adjusted discount rate rather than to accept the one assigned by the market, because there is a certain chicken and the egg quality about using market-derived costs of equity (because the EMH is implicitly assumed, and therefore every equity trades at its proper value). For example, assume that the risk-free rate is about 6.5%, and then assume, say, a 10% risk premium for the purchase of TWX and apply that to TWX's forecasted cash flows. If the PV of those cash flows exceeds the cost then the merger made sense. TTFN, CTC