AOL Time-Warner — Then and Now

What would AOL and Time-Warner have looked like if AOL hadn’t bought Time-Warner? A Financial Times guest editorial today considers the question and comes up with defensible numbers, but an indefensible conclusion.

Before the Time-Warner deal was announced, AOL shares traded at $73.75, giving it a market capitalisation of $170bn. By December this year the combined AOL Time-Warner was worth only $79bn. If AOL hadn’t bought Time-Warner it would have been purely an internet stock, and the Morgan Stanley internet index fell 86% over the period. Arguably, a Time-Warner-less AOL would therefore have fallen to a value of $24bn or so. In other words, instead of having 55% of AOL Time-Warner, AOL shareholders would have had 100% of a $24bn AOL. Having a chunk of AOL Time-Warner — worth $43bn — is clearly preferable.

The situation is different, of course, from the perspective of Time-Warner shareholders. When the deal was announced that company was worth $90bn. The FT says that a portfolio of comparable media companies has dropped 16 per cent since that time, so Time Warner might now be worth merely $76bn. Instead, of course, Time Warner shareholder’s have 45% of AOL Time Warner which is worth merely $36bn. In other words, Time Warner sharholders lost $40bn.

Fair enough, and shame on Time Warner’s Jerry Levin. But the FT columnist (a partner at Boston Consulting Group) goes on to argue that Levin might have spent that $40bn on something else more profitable, and his company would have been far better off.

I suppose, but as the saying goes, if my aunt had wheels she would be a bicycle. That is not what happened, and Time Warner made what its executives thought was the best decision at the time, recombining Time Warner with AOL to create a massive media property. No-one, I don’t think, is alleging actual folly here, at least not in the Tuchman-ian sense of the knowing pursuit of policies contrary to one’s own interests, despite the availability of feasible alternatives. Sure, in retrospect Levin was wrong, but who really and truly knew at the time?

Here, instead, is the author’s finger-waggling conclusion:

“The AOL Time Warner merger was just one more event in the agglomeration of media and entertainment and the churning of asset portfolios. While media businesses are shuffled and must tolerate the occasional meddling of various corporate parents, they will ultimately be run best as stand-alone assets. The people who make money are those who create the content, those who control the physical distribution and, of course, the investment bankers who pander to the egos of media executives who want to build empires.”

Apparently it’s really about class warfare. By that illogic the bad guys are the executives and the investment bankers, not the dopey investors who under-valued Time Warner, and over-valued AOL, forcing the two of them together.