- The Washington Times - Thursday, August 8, 2002

Even by the seemingly titanic standards of the Enron collapse, which cost shareholders about $60 billion, and the WorldCom implosion, in which they took a $115 billion bath, the AOL Time Warner flameout has been astonishingly colossal especially for Time Warner investors.

In January 2000, "New Economy" Internet goliath AOL, using its dot-com-bolstered share price, somehow convinced the much larger "Old Economy" media giant Time Warner, whose revenues were five times AOL's, to sell itself to AOL. On Jan. 10, 2000, the day the merger was announced, the combined company, based upon the closing prices of both AOL and Time Warner, would have been worth nearly $350 billion. Today, with AOL Time Warner's stock price hovering around $10 per share, having collapsed more than 80 percent since the merger was finalized in January 2001, the Wall Street Journal reports that the company is worth less than $50 billion. That's a haircut of $300 billion.

As if that weren't bad enough, the terms of the merger left Time Warner shareholders with only 45 percent of the combined company. And today, the AOL division is acting as a vastly oversized anchor, pulling down the rest of the ship. Clearly, the media properties of the former Time Warner, even in today's adverse advertising environment, are worth substantially more than $10 per share. That means investors are assigning a significantly negative value to AOL today.

In the annals of American business history, it is difficult to imagine a more lopsided, wealth-destroying merger than the one then-Time Warner CEO Gerald Levin orchestrated to the everlasting detriment of Time Warner shareholders. They not only relinquished more than half the value of their premium media properties to dot-com upstarts, but now they must also absorb nearly half the losses related to AOL's evolving collapse.

Adding to the frustrations of Time Warner executives, who recently engineered a coup within the AOL Time Warner corporate suites, is the fact that AOL Time Warner's $28.5 billion debt load, which has plummeted to junk-bond status, probably precludes it from spinning off AOL. AOLprobably could not operate as a stand-alone online company with its share of that debt.

Making matters even worse is the fact that AOL seems to be moving in the wrong direction. Its advertising and business revenues were down a stunning 42 percent in the second quarter compared to a year earlier. Moreover, two-thirds of that revenue was generated by expiring dot-com contracts ($220 million) that are unlikely to be renewed and $50 million from other Time Warner entities, which resent being forced to advertise so heavily on AOL. In addition, AOL's share in the relatively mature Internet-access market has declined, while its subscriber growth rate has slowed to a crawl. Meanwhile, it is getting its clock cleaned in the growth market of broadband access, which is being dominated by telephone and cable companies.

It gets worse. Having questionably capitalized "merger-related costs," AOL may have WorldCom-type problems. It is also being investigated by the Securities and Exchange Commission (SEC) and the Justice Department for the questionable accounting treatment it gave to hundreds of millions of dollars worth of online advertising contracts during 2000, when it was desperately seeking to keep its revenue growing as it was closing the merger with Time Warner. Finally, having signed a "cease and desist" order with the SEC for earlier accounting violations, AOL may face the repeat-offender problem that contributed to the collapse of the Arthur Andersen accounting firm.

In 1999, as AOL's stock price soared toward $100 per share, then-Chairman Steve Case, who is now chairman of AOL Time Warner, declared his goals to be nothing less than to "establish AOL as the most valuable and respected company." Insisting that "we won't settle for just one of them," Mr. Case seems to have achieved neither.

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