homeworkstudyhelp

Our Services

Get 15% Discount on your First Order

STUDENT CASE: AOL-Time Warner Merger     In January 2000, shortly…

STUDENT CASE: AOL-Time Warner Merger 

 

In January 2000, shortly before the bursting of the tech/internet bubble, one of the largest media conglomerates in the world was created when America Online Inc. (AOL), the world’s largest internet company, announced a merger with Time Warner, the largest U.S. media and entertainment corporation.  This collaboration, which was supposed to create the world’s largest branded information, entertainment and communications portal, was hailed as the deal of the century, as the combined market capitalization came in at more than $350 billion, with estimated revenues of over $30 billion annually. 

AOL was founded in 1985, under the name Quantum Computer Systems, as a popular interactive services firm providing content and services to residential customers via dial-up modems.  As the internet grew in popularity, AOL also began to provide internet access to large numbers of people, and in 1991 it changed its name to America Online Inc.  Through the late 1990s, rapid growth ensued, fueled by a simple strategy that involved a large number of acquisitions and geographical expansions.  

Time Warner was first formed through Warner Brothers, which went public in 1925, with the launch of its popular cartoon series.  In the years leading up to the AOL-Time Warner merger, Warner Brothers merged with Time Warner, whose name it adopted, and the Turner Broadcasting System. These acquisitions allowed Time Warner to be transformed into a multi-media company consisting of record labels, motion picture as well as television production and distribution, studio facilities and film libraries, television networks, and book and magazine publishing. 

The merger of AOL and Time Warner was negotiated by Steve Case, the chairman of the former AOL, and Gerald Levin, the chairman and CEO of the former Time Warner in a deal valued at $178 billion, consisting of $160 billion in stock and the remainder covering Time Warner’s outstanding debt.  Case continued his position as chairman while Levin became the new CEO of the merged company, now called AOL-Time Warner.   

Under the merger agreement, Time Warner and AOL shares were converted into AOL Time Warner stock at fixed exchange ratios: Time Warner shareholders received 1.5 shares of AOL Time Warner for each Time Warner share they owned, and AOL shareholders received one share of AOL Time Warner for each AOL share.1  Using market values, AOL valued Time Warner at about $110.60 per share, an astonishing 70% premium over the market’s closing price.  After the merger announcement, the stock price for the combined companies increased 36%. 

Under the deal, although AOL contributed only 18% of the merged company’s pre-deal revenues and 30% of the operating cash flow, AOL shareholders still received the majority of the shares in the merged company.  The end result was that AOL shareholders owned approximately 55% and Time Warner shareholders 45% of the new company, even though Time Warner contributed substantially more real assets.  

The very high valuations for “New Economy” internet stocks made this deal possible.  One commentator wrote that “the deal also has huge significance because it is the first time one of the highly priced new media companies has attempted to convert its Wall Street rating into real money with a merger or takeover.”2  Another commentator, looking back at this period, writes that “during the 1990s, many upcoming internet start-ups, the so-called dotcoms, were tremendously overvalued and … without ever having made profit were worth as much as established blue-chip companies because investors believed in their potential.”3 

 

Discussion Question 

 

Is this merger surprising given the environment of the time and in light of the merger theory ?  Discuss the various incentives of the managers of the two firms. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share This Post

Email
WhatsApp
Facebook
Twitter
LinkedIn
Pinterest
Reddit

Order a Similar Paper and get 15% Discount on your First Order

Related Questions

Your have just sold your house for $1,000,000 in cash. Your…

Your have just sold your house for $1,000,000 in cash. Your mortgage was originally a​ 30-year mortgage with monthly payments and an initial balance of $700,000. The mortgage is currently exactly 18.50 years​ old, and you have just made a payment. If the interest rate on the mortgage is 6.25%

In 1624 the Native Americans sold Manhattan Island for only $24….

In 1624 the Native Americans sold Manhattan Island for only $24. But wait, was the figure really that low? If the Native Americans had reinvested that $24 at 7.5 percent annual interest, they would now have over $20 trillion–an amount sufficient to repurchase a good part of New York City. 

A 10-year corporate bond has a coupon rate of 5% with annual…

A 10-year corporate bond has a coupon rate of 5% with annual payments. If interest rates rise to 8% on similar bonds, then what is the value of the bond in the marketplace?2) A 10-year corporate bond has a coupon rate of 5% with quarterly payments. If interest rates rise to

HSBC rolls out multi-currency digital wallets to compete with its…

HSBC rolls out multi-currency digital wallets to compete with its rivals London-based HSBC bank has today announced the launch of its multi-currency digital wallet that will ensure people make international payments securely and safely. Named, HSBC Global Wallet, it is the first multi-currency offering by a US bank that removes

create common-size balance sheets, income statements, and…

create common-size balance sheets, income statements, and statements of cash flows for General Motors (NYS:GM) for 2021 and 2022. Identify one company that competes with General Motors (NYS:GM), obtain their financial statements for the most recent two years, and prepare common-size balance sheets, income statements, and statements of cash flows

Present Value of an Annuity Find the present value of the following…

Present Value of an Annuity Find the present value of the following ordinary annuities. (Notes: If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can “override” the variable

When evaluating whether to seek deferral of payment of Federal…

When evaluating whether to seek deferral of payment of Federal estate tax, an executor must consider I. did the decedent own an interest in a closely held business II. does the estate qualify under Section 6166 to pay the estate tax in installments III. degree of liquidity of estate assets

when reviewing teslas finical data I think I found out that Their…

when reviewing teslas finical data I think I found out that Their current total assets is 43.875 billion and there total current liabilities are 27.592 billion resulting in their working capital of 16.283 billion.  Is this correct when viewing on Mergent? Does the business have enough working capital ready to

Which of these would make a good topic sentence for a paragraph or…

Which of these would make a good topic sentence for a paragraph or essay containing the information listed in the prewriting activity? Check all that apply. While e-mail is quick and convenient for everyday communication, handwritten letters are the right choice for personal, heartfelt messages. It can take a while to

Determine the market value of debt  given the following…

Determine the market value of debt given the following information. Round your final answer to the nearest million with zero decimal places. For example, if your answer is $89.12, enter 89 with no currency symbol.   4.30% Cost of Debt (Kd)   The company faces the following forecasted CFFD (Cash Flows For Debt):

Discussion Questions: Discuss the difference between NOPAT and net…

Discussion Questions: Discuss the difference between NOPAT and net income and explain which one is the better measure of a company’s performance, and why? Calculate the Economic Value Added for the company that you selected for the Company Analysis Project and critically evaluate the result? Should the company that you

How to find these with their formulas:  FUTURE VALUE PRESENT VALUE…

How to find these with their formulas:  FUTURE VALUE PRESENT VALUE FINDING THE REQUIRED INTEREST RATE TIME FOR A LUMP SUM TO DOUBLE  FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM LOAN AMORTIZATION AND EAR PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS PRESENT