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.

The Cuba-Canada Conundrum

There is an interesting and mischievous OpEd in today’s Wall Street Journal about trade relations with Cuba. The piece argues that while trade can be a democratizing force, that still has not been the case in Cuba. Economic liberalization reached a peak in 1992-94, and has declined since. Nevertheless, trade continues apace with countries like Canada, largely in the form of tourism (it is the largest source of Cuba-bound tourists) and joint ventures.

“… at present there are more than 375 joint-ventures with foreign capital approved and working in the country. Some 52% of these come from the European Union, 19% from Canada and 18% from Latin America. There are more than 40 countries of origin, with Spain, Canada and Italy coming first, second and third. None of these companies would put up with these conditions in their own country, but current and potential profits make them look the other way.”

As the piece points out, Cuban workers don’t extract much benefit from their work in such joint ventures.

“Agencies of the Cuban government like Cubalse and Acorec provide the workers, who are then re-employed by the mixed companies. In these conditions, employees lack motivation and are disloyal. The system, however, is convenient for some foreign consciences as it takes the onus off of them for what is essentially modern slavery. That is because the state keeps around 95% of what the companies pay for these workers. The government pays these employees $10 to $30 per month and pockets the rest.”

Granted, the Wall Street Journal has long been on a jihad against Cuba, and U.S.-Cuba policy is a strange, inconsistent, and internally contradictory thing, but Cuba is being ignored again, and these trade issues could rear up and bite soon — especially if Cuba is ever (and almost certainly wrongly) linked with any of the malefactors who currently wish the U.S. ill.

The (Invisible) eBay Economy

A while back eBay began mining and reselling information from its database of transactions on its site. At the time, while most people ignored the announcement from eBay, I said that it marked a massive change in the market for price information.

It is a kind of “informating” apotheosis. That is, eBay now throws off profligate amounts of information along multiple dimensions — prices, volumes, types, products, etc. — because of the way it has been automated. Capturing that information and reselling it, given eBay’s size and scope, is a big deal in the worlds of pricing, competitive intelligence, and even microeconomics.

Here are some nuggets from a new piece in USA Today talking about how eBay is beginning its mine its own systems:

  • At the beginning of 2003, BMWs, Gucci and Prada were among the 10 most-searched terms. Now the most-searched items have shifted to Fords, anything pink, and gold (the kind you store in a wall safe).
  • Word searches for all of 2002 reflect a society still spending freely. Among the top 10 searches for the year were BMW, Louis Vuitton, Prada and Coach.
  • Similar terms dominated the top 10 into early 2003, until August, when there was a sudden shift. The Iraq war was dragging on. Companies were still cutting jobs and keeping raises flat. The blackout hit. California was in political chaos with its recall vote. And just then the luxury names dropped off eBay’s top 10, replaced by more mundane words such as Ford, Chevy and diesel.
  • In September, “salvage” made it to the top 10.

No mas: Year-end reviews of 2003

No mas. I’ve had enough of these year-end reviews of 2003. They’re everywhere. Blah, blah, blah, business stories of the year. Here is all you need to know about business in 2003: junk stocks ruled. Equities that were trash in 2000-2002, were cash in 2003. Everything else anyone tells you either a) you couldn’t make money from knowing it, or b) they only realized it after the fact.

So, herewith, some snippets from Dave Barry’s review of 2003 instead:


  • An outbreak of the SARS virus in Asia is blamed for dozens of deaths, many of them travel agents committing suicide.

  • May

  • Elsewhere abroad, Chinese health authorities, stung by accusations that they have been slow in reacting to the SARS virus, announce that they will execute anybody who gets sick.
  • In entertainment news, CNN switches to a new format that consists entirely of Larry King talking to former prosecutors about Laci Peterson.

  • August

  • In rural northern Ohio, 83-year-old widow Eileen Freemonkle decides that, for a change, she will put two Pop-Tarts into her toaster, instead of her usual one. This rogue action — never anticipated by the designers of the nation’s electrical power grid — sets off a chain of events that ultimately blacks out the entire Northeast. As rescue crews work overtime trying to keep people in the affected areas supplied with news about the developing Kobe Bryant situation, Congress swings into emergency action; within hours, Democrats and Republicans have issued literally hundreds of press releases blaming each other. Power is finally restored several days later by power company workers, aided by bored North Korean troops.

  • October

  • In immigration news, federal agents in 21 states descend on Wal-Mart stores that are allegedly employing illegal immigrants; the agents emerge hours later, glassy-eyed, holding bags filled with hundreds of dollars’ worth of bargains but unable to remember what they went in there for in the first place.

  • December

  • December begins on an upbeat note thanks to strong holiday retail sales, as measured by the economic indicator of Mall Shoppers Injured in Fights Over Sony PlayStations.
  • In other positive news, the Commerce Department reports that the economic recovery has finally resulted in job creation. “So far, it’s only the one job, and it’s in urinal maintenance,” notes the department. “But if things work out, it could become full time.”
  • In a medical breakthrough, a Houston-based team of surgeons, working for 17 hours in a risky, first-of-its kind operation, is able to separate a 21-year-old woman from her cellular telephone. She expires within hours, but doctors report that the phone is stable, and they expect its condition to improve dramatically “once it finds a new host.”
  • The month’s biggest surprise occurs when U.S. troops finally capture a filthy and bedraggled Saddam Hussein hiding in a hole along with 11 other members of the cast of the CBS reality show “Survivor: Iraq.” The former dictator immediately hires attorney Johnnie Cochran, who reveals that his defense strategy will be based on the legal argument that “if there’s no WMD, you must set him free.”

  • Economist vs. Economist: Dissecting the Roaring 90’s

    What caused the economic boom of the 1990s? Was it chance, conscious policy, or some combination of both? And when it ended, was it because of policy errors, or was it just that it the U.S. economy’s run of good luck simply ended?

    Bill Nordhaus of Yale does a yeoman job of trying to reconcile the differing views on the subject in an essay in the current New York Review of Books. He considers the cases laid out in two books: The Fabulous Decade: Macroeconomic Lessons from the 1990s, by Alan S. Blinder and Janet L. Yellen; and The Roaring Nineties: A New History of the World’s Most Prosperous Decade, by Joseph E. Stiglitz.

    The latter book — and its Nobel-prize winning author — comes off indiffierently, with Joe Stiglitz being lauded for the practical relevance of his views on asymmetric information (c.f., Jack Grubman & Worldcom), but also being accused by Nordhaus of somewhat thin economic analysis. Here is an example of Nordhaus on Stiglitz:

    “Stiglitz occasionally stretches the interpretation of events, and his arguments are sometimes overstated or inaccurate. One example is a tendency to exaggerate the extent to which Keynesian theories are accepted doctrine.”

    Instead, Nordaus find much common ground with Blinder in arguing that low inflation and low unemployment were transitory, despite being immensely important to the 1990s growth. After all, as Nordhaus writes, they “reduced inflation by between 2 and 5 percentage points between 1995 and 1999.” As a result, he writes, paraphrasing Blinder, “…by 1999, the unemployment rate was 11/2 percentage points lower than it would have been without the favorable shocks”.

    Much of the piece revolves around the following table:

    Using the preceding, Nordhaus concludes by arguing, alongside Stiglitz, that whatever you might think of the Clinton years and economic opportunities squandered there (or not), the current Bush administration has been even more irresponsible:

    “The long-term management of our economy has fallen prey to the short-term maximization of votes in which the planning cycle of the US administration extends no further than November 2004. For all these consequences, surely, the faults lie in misguided policies of the Bush administration and not in the stars.”

    Apparently, the 1990s are going to be a kind of economic Rorschach test, with economists dueling over what the period really means for free-market and more interventionist economic policies. Both schools of economists, judging by this Nordhaus/Stiglitz tussle, are finding what they want there, so it looks like we have ourselves at least one full-employment act — albeit if only for academic economists.

    Marquee VC money’s value? 10-14%

    Venture capitalists love to say that if you’re only coming to them for money then you’re coming to the wrong place. Their point: a good VC, you know, Kleiner Perkins, or Sequoia — or, of course, ahem, the firm you’re talking to — has more to offer than merely check-writing prowess. For example, so this self-serving argument goes, they can offer the people that only such marquee investors know, and they can offer oodles of experience with fast-growing companies just like yours, and so on.

    Entepreneurs buy that, to a degree, but it has always been an open question how much entrepreneurs were (or should be) willing to pay for it. Now, however, we have a partial answer. According to a paper that will soon appear in the Journal of Finance, entrepreneurs with competing financing offers, at least one of which is from a “high reputation” VC, will generally choose the marquee VC. No surprise so far, but here is the interesting bit: they’ll generally give that winning VC firm a 10-14% better price (i.e., the venture firm gets more equity for the same price, or the same equity for a lower price) than they were offering less notable venture firms.

    It sure makes life easier as a VC getting higher returns if you can get a cut-rate price on the way in.

    Wall Street’s bear hunt

    People who missed the recent bear hunt in New Jersey may soon be able to cross over into New York and have another go. Many argue that before the current bull market in equities sputters, the media (and investors) will have to turn around and hunt down its formerly favorite Wall Street bears.

    The crux of the argument: rallies don’t end until bears give up. Here is Forbes columnist Ken Fisher’s way of putting it:

    “I’m waiting for most of the big-name investors who were pound-the-table bearish as 2003 began to either capitulate or be publicly ridiculed. That hasn’t happened yet.”

    I’m generally sympathetic to Fisher’s view. Some prominent investors, strategists, and commentators have become weirdly comfortable as bears, to the point that it’s hard to imagine what would make them optimistic again, short of market price-earnings multiples falling to historical lows. But what they forget is that market participants know that people who sold in the past at historical lows now look like fools, so it’s unlikely — short of nuclear attack — that we will reach those levels so neatly again. Only once bears figure that out and finally become bullish will we know that there is no-one left to buy in the current rally.

    One caveat: Fisher himself is something of a perma-bull. He called the end of the 2000-2002 bear market too early at least twice, and must have lost investors money doing so. So while he can be forgiven, at least a little, for his schadenfreude given the troubles of market skeptics who stayed skittish too long, he doth gloat a little too much given his own record.

    Nevertheless, here is Fisher’s pantheon of bears for whom hunting licenses (metaphorically speaking) will soon be granted:

    • Richard Bernstein — Merill Lynch

    • Robert Shiller — Yale University
    • Jeremy Grantham — Grantham, Mayo, Van Otterloo
    • Bill Gross — Pimco
    • Richard Pell — Julius Baer Investment Management
    • Douglas Cliggott — Brummer & Partners
    • Stephen Roach — Morgan Stanley
    • Robert Prechter, Richard Russell and Martin Weiss — newsletter writers
    • James Grant and Gary Shilling — Forbes columnists

    Greatest Business movies ever

    While some are (correctly) complaining that Forbes’ list of the ten greatest business movies is strangely anti-business, my main beef is that too many of the movies named are boring. Here is the list:

    Citizen Kane, The Godfather: Part II, It’s a Wonderful Life, The Godfather, Network, The Insider, Glengarry Glen Ross, Wall Street, Tin Men, Modern Times.

    You could have had a computer do the picking and come up with the same dry choices. Sure, Modern Times is a classic, but be honest, it’s all but unwatchable for current-day audiences. And yes, yes, Citizen Kane, but couldn’t we just concede that one to the “Best Movie Ever” crowd and use the slot for something else?

    Here are a few additions & changes, in no particular order:

  • Joe versus the Volcano (first twenty minutes)
  • The Hudsucker Proxy (or almost anything by the Coen brothers)
  • A Shock to the System
  • Big (especially the parts deconstructing creativity in companies)
  • Working Girl (which even sports a sympathetic female businessperson)
  • Canadians at the Gate: Air Canada’s Bankruptcy Bids

    So we finally have some details about Victor Li’s (winning) bankruptcy bid for Air Canada, as well as on Cerberus Capital’s (losing) bid. You wouldn’t know, having looked at the details of the respective offers, that Cerberus’s was the loser and Li, son of Chinese billionaire Li Ka-Shing, was the winner.

    The nugget that is getting reported most is that Air Canada creditors will get 25.7 cents on the dollar under Victor Li’s latest proposal, as opposed to 25.1 cents on the dollar under Cerberus’s offer. That is awfully close stuff, but, all else being equal, it does tilt gently to Victor Li.

    The trouble is, all else isn’t equal. There are three nasty assumptions underlying Li’s offer, and violate any of them and Cerberus’s bid is a winner:

    1. The Li bid assumes a post-bankruptcy equity valuation for Air Canada of $5-billion. If it is less than that, then Cerberus’s bid, which relies less on equity and more on cash, comes out ahead. So if you think that full-service airlines are going to be highly valued in future, go with Li. And if you really think that, then you haven’t been reading the news.

    2. Under Victor Li’s original offer, GE Capital was to get a 9.56% stake in the restructured Air Canada. Under his revised offer, Li is offering to buy out GE’s stake and make it available to the unsecured creditors. Fair enough, that makes more equity available to creditors, but creditors could have cut their own deal with GE without Li’s intervention. In other words, there is a collossal assumption here: Li’s deal implicitly assumes that no-one but Li could have cut a deal with GE, which is simply untrue.
    3. As part of the winning Li offer, Deutsche Bank is leading a C$450 million rights offering. Under that offer, creditors can buy additional Air Canada shares at a discounted rate. But again, there is no reason Cerberus couldn’t have done someone similar, and as a matter of fact it had proposed to do that. Li just stole some thunder in this bizarre-o auction process whereby Li got to see Cerberus’s last offer and respond, but Cerberus didn’t have the same right.

    Lurking under all of this, of course, is that Li holds a Canadian passport, and Cerberus is a U.S. company. Under expensive and discredited Canadian foreign ownership rules, Li gets a leg-up enabling him to circumvent the 25% ownership ceiling that otherwise hobbles Cerberus (and any other would-have-been bidders).

    As I wrote in a National Post column this week, the only thing that this Li win guarantees is that Air Canada will exit bankruptcy within six months — and re-enter it within six years. And that will be long after, of course, Victor Li has sold his shares and left.

    TOEFL, technology, and trade

    Some reports are saying that Chinese TOEFL-takers (the Test of English as a Foreign Language) have declined precipitously in recent years. According to the article, at peak, in 1999, 100,000 Chinese students a year took the test, most of whom hoped to study abroad, in particular in the U.S. That number has supposedly declined 90%, with only 10,000 Chinese students taking the TOEFL this year. The article blames post 9-11 visa restrictions.

    If true (but see below), the decline has many implications. First, and most importantly, it means far fewer Chinese graduate students. And that, in itself, is a big deal for suffering U.S. universities. Foreign graduate students pay among the highest tuitions on campus, and they make up more than half of many graduate science & technology programs. Less Chinese graduate students means less university income, and less income means commensurate cost cuts — or more income from somewhere else, like tuition increases or goverment transfers (taxes).

    Fewer incoming graduate students also means fewer outcoming graduate students. Given the disportionate numbers of such graduates employed at U.S. technology companies, from Intel to Cisco and so on, that is an implicit tax on U.S. technology firms. In effect, they are forced to bid for other students, thus raising the cost of doing business, while reducing the overall depth and quality of their workforce.

    Finally, while I said at the outset this decline is thought to have to do with post-9/11 restrictions, any real decline would almost certainly also have to do with the slow but steady maturation of the Chinese economy. They simply don’t have as many students who feel that they have to go elsewhere to succeed — and that would be more noteworthy news for the rest of us than whimsical U.S. visa policies.

    [Update] Despite the claims to the contrary I cited above, the statistics from the TOEFL folks themselves don’t bear this decline out. See this chart for what ETS says is the number of people in mainland China taking its TOEFL each year since 1999. Sure doesn’t look like decline to me. It actually looks more like a fairly healthy increase. While there may be regional patterns that are missed in this data, overall it certainly looks like 9/11 visa restrictions haven’t cut the Chinese ardor for taking the TOEFL.