- The Washington Times - Thursday, January 16, 2003

AOL Time Warner Chairman Steve Case's recent announcement that he will be leaving his position in May came almost exactly three years to the day that the Internet entrepreneur-extraordinaire shocked the business world. In a stunning surprise on Jan. 10, 2000, Mr. Case, then the CEO of AOL, and Time Warner boss Gerald Levin announced that "New Economy" AOL would be merging with "Old Economy" Time Warner. At the time, it marked the biggest merger in history.
Citing what appeared to be seemingly unlimited synergistic opportunities for the new behemoth, the two executives estimated the value of their combined companies to be nearly $350 billion.
Mr. Case's timing proved to be exquisite. AOL's stock price peaked in December 1999, just as Internet-related technology stocks were approaching their zenith. In retrospect, Mr. Case used his company's vastly overvalued stock price as the currency to buy the real assets of one of the largest entertainment firms in the world. Amazingly, with annual revenues about one-fifth the size of Time Warner's, Mr. Case managed to grab 55 percent of the combined company for AOL shareholders. Today, the market value of AOL Time Warner is a relatively puny $66 billion, less than 20 percent of its presumed value the day the merger was announced.
Clearly, the vast, cash-generating entertainment assets of the Time Warner division are worth more than the market value of the combined company. What that means is that the stock market is valuing the AOL division at less than zero, despite its market-leading 35 million online subscribers. Just before the Internet bubble burst three years ago, when AOL had 22 million subscribers, the market valued AOL operations at $90 a share.
The utter collapse, even as AOL added 12 million paying customers, is not as irrational as it seems. AOL is also saddled with about $9 billion of debt; advertising and business revenues are plunging; its dial-up subscriptions are approaching the saturation point; and it is getting its clock cleaned in the broadband market. Thus, AOL would not likely be able to service its debt if it were spun off.
In hindsight, for AOL shareholders in 2000, who now effectively control 55 percent of Time Warner's assets, the merger engineered by Mr. Case proved to be a stroke of genius. On the other hand, history will likely record that Mr. Levin entered into the worst merger of all time, exchanging more than half the once-highly valued media and entertainment properties for a boatload of now-less-than-worthless AOL shares. The biggest loser of all? Well, that would be Ted Turner, who has taken a $5 billion haircut.

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