AOL Time Warner
From Invertopedia, the encyclopedia of how things fail
AOL Time Warner was the company formed when America Online, then the world's No. 1 internet company[8], agreed in January 2000 to buy Time Warner in what ABC News called the biggest corporate merger of all time[1]. The combined company was valued at about $350 billion[2]. Two years later it reported a 2002 net loss of $98.696 billion, driven by goodwill write-downs of $54.235 billion and $45.538 billion[3], and in 2009 AOL was spun off on its own at a value of about $2.5 billion[7][9].
Contents
The bet
Old media and new would be worth more together. Time Warner had the content: CNN, HBO, Warner Music, Time and Sports Illustrated[1]. AOL had more than 20 million subscribers[8] and a stock market value of $166 billion[8]. "This merger will launch the next Internet revolution," Steve Case said[1].
AOL paid in its own stock[2]. Its shareholders would own 55 percent of the combined company[1][8], with Case as chairman and Time Warner's Gerald Levin as CEO[1].
What happened
| Jan 10, 2000 | AOL agrees to buy Time Warner. Time Warner's shares jump 39 percent; AOL's fall.[1] |
|---|---|
| Dec 2000 | The Federal Trade Commission clears the deal.[6] |
| Jan 11, 2001 | The merger is completed.[3] |
| Dec 2001 | Gerald Levin resigns as CEO and is replaced by Richard Parsons.[6] |
| Q1 2002 | On adopting a new accounting rule, the company takes a $54.235 billion goodwill charge, which the company says reflects market declines since the merger was announced.[3] |
| Q4 2002 | Another $45.538 billion is written off, $33.489 billion of it at AOL.[3] |
| Jan 29, 2003 | The company reports a fourth-quarter loss of $44.9 billion and a 2002 loss of $98.7 billion. Ted Turner steps down as vice chairman.[4] |
| 2003 | The company drops "AOL" from its name.[6][10] |
| Dec 9 – 10, 2009 | Time Warner spins off AOL, one AOL share for every eleven Time Warner shares. AOL starts trading on its own.[7] |
The kill shot
AOL bought real assets with stock priced at the top of the dot-com bubble, and the business behind that stock, dial-up internet, was about to be replaced by broadband.
The company itself tied its first 2002 write-down to the fall in markets since the merger was announced[3]. Its 2002 annual report said it expected dial-up subscribers to keep declining as people moved to broadband, and that broadband carried lower margins[3]. AOL's US subscribers slipped from 26.7 million in September 2002 to about 26.5 million at year end[3].
Advertising went too. Advertising and commerce revenue at the AOL segment fell 38 percent in 2002, from $2.585 billion to $1.600 billion[3]. The SEC and Justice Department opened investigations into AOL's accounting, and the company restated $190 million of advertising and commerce revenue[3].
Red flags ignored
- Paid in bubble money. AOL's $166 billion market value rested on $4.8 billion of yearly revenue.[8]
- A big premium for the old company. The deal priced Time Warner shares at about $108, against $64.75 before the announcement.[1]
- The core was on dial-up. AOL's own filings expected dial-up subscribers to keep falling as customers moved to broadband.[3]
- Ad numbers that needed fixing. The AOL ad business drew federal investigations and a restatement.[3]
The cost
A 2002 net loss of $98.696 billion, against a $4.934 billion loss in 2001[3]. NBC News reported it as the largest loss in US corporate history[4], and Guinness lists it as the greatest annual net loss by a company[5]. The two goodwill charges alone came to $54.235 billion and $45.538 billion[3].
AOL, worth $166 billion on its own when the deal was announced[8], was valued at about $2.5 billion in early trading before its 2009 spin-off[9].
The inversion
When you pay in your own inflated stock, ask what the deal looks like at a sane price. And check whether the business you are bringing to the table is the one that is about to be replaced.
What survived
Both halves, apart. Time Warner kept the media business[6][7]. AOL went its own way in 2009[7], was bought by Verizon in 2015 for $4.4 billion[11], and in 2017 was combined with Yahoo inside Verizon's Oath unit, led by AOL CEO Tim Armstrong[12].
References
- ^ “AOL Buys Time Warner for $162 billion”. ABC News (Seth Sutel), January 10, 2000. The $162 billion deal, "biggest corporate merger of all time", the brands, the 55 percent split, Case and Levin's roles, the share moves and Case's quote.
- ^ “AOL & Time Warner Merge Into New Media Giant”. Animation World Network, January 2000. The January 10, 2000 announcement, the stock-for-stock structure and the $350 billion combined market value.
- ^ “AOL Time Warner Inc. Annual Report on Form 10-K for 2002”. AOL Time Warner filing with the SEC, 2003. The January 11, 2001 completion, the $98.696 billion loss, the $54.235 and $45.538 billion charges, AOL ad and subscriber figures, the broadband outlook, the SEC and DOJ investigations and the $190 million restatement.
- ^ “AOL posts loss; Turner steps down”. msnbc.com with Reuters, January 29, 2003. The $44.9 billion fourth-quarter loss, the $98.7 billion year, largest in US corporate history, and Turner stepping down.
- ^ “Greatest annual net loss by a company”. Guinness World Records. The record: $98.7 billion, reported January 2003.
- ^ “AOL-Time Warner merger announced”. History.com. FTC clearance in December 2000, Levin's December 2001 resignation, the 2003 name change and the 2009 AOL spin-off.
- ^ “Time Warner announces AOL spin-off details (Exhibit 99.4 to Form 8-K)”. Time Warner filing with the SEC, November 16, 2009. The December 9, 2009 distribution, one AOL share per eleven Time Warner shares, and regular trading from December 10.
- ^ “Punahou grad Case to serve as chairman of media-'Net giant”. Honolulu Star-Bulletin with AP and Bloomberg News, January 10, 2000. AOL's 20 million-plus subscribers, $4.8 billion fiscal 1999 revenue, $166 billion market value, and the 55 percent split.
- ^ “Early Trading Values AOL At $2.5 Billion”. TechCrunch (Erick Schonfeld), December 3, 2009. AOL's roughly $2.5 billion value in early trading.
- ^ “WarnerMedia”. Wikipedia. The 2003 return to the Time Warner name (cross-check).
- ^ “Verizon buys Yahoo for $4.83 billion”. TechCrunch (Romain Dillet), July 25, 2016. Verizon's 2015 purchase of AOL for $4.4 billion.
- ^ “Verizon closes $4.5B acquisition of Yahoo, Marissa Mayer resigns [Memo]”. TechCrunch (Ingrid Lunden), June 13, 2017. Yahoo and AOL combined into Oath under Tim Armstrong.