After movie star Angelina Jolie split from her husband, actor Billy Bob Thornton — as virtually everyone in the known universe expected her to — she almost immediately had the tattoo of her husband's name lasered off (a time-honoured Hollywood tradition, much like divorce itself). In a similar way, corporate behemoth Time Warner has now erased any trace of the name of its former love, America Online.
He two are still married, of course, since the on-line company remains a division of Time Warner (at least for now). But, to use a slightly different analogy, it has been demoted from No. 1 wife to just one of many — and not a particularly strong performer either. Almost four years after the world's largest merger, a deal fuelled by AOL's sky-high value, Time Warner has finally come full circle.
The AOL Time Warner deal, a merger that seemed to require a host of new and better adjectives because it was so enormous, seems more than a little absurd now. At the time the merger was announced — or rather, the takeover of Time Warner by AOL, since that's what it effectively was — America Online was less than one-fifth the size of its target in terms of revenue, and even smaller in terms of its profit.
In fact, when the two companies were put together, Time Warner's assets accounted for more than 80 per cent of the revenue of the new company. Yet AOL's market value of $167-billion (U.S.) dwarfed that of its larger partner, which had a value at the time of just $97-billion. In fact, there were many critics of the merger — but hardly any were afraid that Time Warner was trading itself for a mess of Internet pottage; instead, most of them were concerned that AOL might be slowing itself down by buying a slow-growing old piece of junk like Time Warner.
At the news conference announcing the deal, CNN founder Ted Turner bragged that he had cast the first board vote for the merger, and said he approved it with as much enthusiasm as when he first made love to a woman 42 years previously. Time Warner chairman Gerald Levin said the deal was "a statement by me that the value created in the Internet space is very real," while AOL Chairman and CEO Steve Case called it the first of "the Internet century."
Mr. Levin's motivation for the merger was relatively obvious. He had reportedly been frustrated for some time that Time Warner's media, entertainment and cable assets weren't being properly valued by investors, and that "new economy" companies such as AOL and Yahoo were getting all the attention. What better way to bring up the value of Time Warner's shares than by marrying them to a high-flying Internet stock at the height of the boom?
In fact, of course, the deal itself was the single biggest sign that the Internet bubble was reaching its peak — when a company that barely even existed a decade earlier could acquire one of the largest movie, entertainment and cable entities in the world, a company five times its size, and have value left over. Almost from the moment the merger was first announced its value began to subside, much like the Internet wave it rode in on.
When news of the merger broke, the AOL stock being offered for Time Warner was worth $160-billion, and after the announcement the value of the deal soared as high as $190-billion. By the time the new entity was actually created a year later, its market value had fallen to $110-billion. By the spring of last year, the value of the entire company — which at one time had been well north of the $350-billion mark — had fallen to a measly $82-billion, or about half the value of the shares that AOL had originally pledged.
In April of last year, AOL Time Warner took a writeoff of about $54-billion, producing the largest corporate loss in history. That wiped virtually all traces of AOL's value from the balance sheet, leaving losses that will keep Time Warner sheltered from taxes for decades. And now, all trace of AOL has been removed from the letterhead as well — it's just another division, like publishing or music. In fact, in terms of revenue and operating income, AOL comes fourth out of the company's six operating units.
Will the change make any real difference for Time Warner? Hardly. The real demotion of AOL from the pinnacle of the Time empire took place long ago, and the demotion of it in the eyes of investors is also history. "From a fundamental basis, which is 99.9 per cent of what we care about, it makes no difference," Harris Associates research director Henry Berghoef told CNN Money. "I'm not going out to buy more stock because of a change of name." David Mantell, an analyst at Loop Capital Markets, said that "a name change is nice, but does it mask the ongoing weakness? No. It's a cosmetic thing."
Now Time Warner is just a regular old cable, media, entertainment and movie colossus, with a little on-line division that sells Internet access and has a Web portal through which it tries to flog its various merchandise. Nothing to get excited about.
E-mail Mathew Ingram at mingram@globeandmail.ca
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