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AOL/TW loses $50 billion in a quarter.

By Mephron in Media
Wed Apr 24, 2002 at 08:25:26 PM EST
Tags: News (all tags)
News

The LA Times has a story running that AOL/Time Warner is set to announce they lost $50 billion dollars in the last quarter.


In addition to the fact that they have to write down their assets by a staggering $54 billion, the cost of the stock has slid horrifically since the merger: a combined value of $290 billion at the time of the merger has become $85 billion now. Did AOL suck the life from Time Warner, or was the Great Economic Correction to blame for this? And how will it be spun by the various economic commentators to make it look?

A comment from the story in the times reads:

Entertainment companies, often with Wall Street's blessing, have embraced the financial measure EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization - inserted by mephron). It is a "profit" number that excludes many kinds of expenses, including debt interest, taxes, depreciation and amortization.

The theory was that traditional financial measurements don't accurately portray the health of companies that have invested in big projects such as cable systems, broadcast networks, technology and telecommunications networks.

What effects will it have on people, other than the who-knows-how-many that are going to lose their jobs to make up the shortfall (none of them quite probably, highly-paid executives)?

From a discussion at NetSlaves on this issue come comments like this:

From 'steve_gilliard': Even if you assume much of that value was dotcom boom inflated, it still represent that the combined companies is weaker than the two companies seperate. Mistake? No fucking kidding.
The sad reality is that most mergers are a bad fucking ideas

From 'AJ Levy': A related thought... assuming that most of the funny accounting would probably have been on the AOL side, could the shareholders of TWX possibly sue the company?

Other ideas, comments, or issues? Considering this is probably the largest US media conglomerate - both online and off - this has some significant potential for the economy as a whole.

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AOL/TW loses $50 billion in a quarter. | 35 comments (21 topical, 14 editorial, 0 hidden)
AOL (4.00 / 4) (#8)
by CodeWright on Wed Apr 24, 2002 at 01:18:44 PM EST

sucked the life out -- primarily through a stock-swap in the acquisition that relied on a horrendously overvalued market cap for AOL.

the shareholders of Time-Warner were utterly bilked.

--
"Humanity's combination of reckless stupidity and disrespect for the mistakes of others is, I think, what makes us great." --
But were they conned? (3.00 / 1) (#10)
by cyberformer on Wed Apr 24, 2002 at 01:59:49 PM EST

They got a bad deal, no doubt about that. But even at the time, many people were saying that the Bubble was about to burst, and even praising Steve Case for deciding to cash in his chips just before they became worthless.

[ Parent ]
Doubtful (4.50 / 2) (#15)
by DarkZero on Wed Apr 24, 2002 at 04:19:25 PM EST

The tech bubble was about to burst, but everyone thought AOL's stock was still a sure bet. Most importantly, AOL was a sure bet... until the merge with Time Warner. As far as I know, the only reason for this problem is the nature of mergers between two large companies. Sometimes you can stack the two giants on top of one another, creating a enormous beast that can crush all competition. Other times, the two giants end up joined at the ankle and stumble over each other as they try to keep up with the competition. This situation would be the latter.

[ Parent ]
Yep, Steve monetized his bubble (5.00 / 1) (#31)
by isdnip on Thu Apr 25, 2002 at 11:09:32 AM EST

It was painfully obvious, though many refused to admit it at the time, that the Internet stock sector was incredibly overvalued in 1999. I don't think Steve Case originally expected to be a multi-billionaire. And, having worked with AOL as a supplier (not customer), I can't say that it was (to put it politely) the best-run operation I'd ever seen. But when he was at the top, he made the smartest move of his life. He used the paper value of AOL's stock to purchase a real asset that would have staying power.

I'm frankly surprised that more dotcom bubble companies didn't do this. Lots of worthless companies had market caps bigger than household name hard-good companies. What AOL did was monetize it stock price. And now, with the market value of AOL proper down by, say, 90% or more, AOL's shareholders are propped up by the residual value of Time-Warner.

Sure, the deal sucked big time for T-W stockholders. But that's how the stock market works. A smart shareholder would have cashed out of AOLTW early and bought something with less bubble to it. But then stock speculation is always a gamble, and it's easy to pick the winners of a race after the horses have crossed the line.

[ Parent ]

50 *billion* (3.80 / 5) (#12)
by delmoi on Wed Apr 24, 2002 at 03:00:46 PM EST

Fuck, I wish someone would give me 50 billion dolars to waste in 3 months.
--
"'argumentation' is not a word, idiot." -- thelizman
I couldn't do it (4.00 / 2) (#16)
by TheGreenLantern on Wed Apr 24, 2002 at 04:52:03 PM EST

Seriously, I don't think I could spend $50 bil in three months if I started dropping the shit from airplanes. These mega-corporations truly live in another world.

It hurts when I pee.
[ Parent ]
You obviously don't.... (5.00 / 4) (#17)
by BushidoCoder on Wed Apr 24, 2002 at 05:11:38 PM EST

... have a girlfriend. Mine could tear through that in a day on shoes alone.

\bc

[ Parent ]

Ummmm (4.40 / 5) (#23)
by wji on Wed Apr 24, 2002 at 06:57:54 PM EST

Assuming the average cost of a pair of shoes to be $250, and the average weight of a pair of shoes to be 200 grams, you'd have 200 million pairs of shoes weighing 40 thousand metric tonnes. That is roughly equivalent to the displacement of the HMS Prince of Wales, and would be roughly sufficient to give every female in North America a pair of expensive shoes.

This information brought to you by the much-more-than-you-needed-to-know department.

In conclusion, the Powerpuff Girls are a reactionary, pseudo-feminist enterprise.
[ Parent ]

$250? (none / 0) (#33)
by SIGFPE on Thu Apr 25, 2002 at 03:28:21 PM EST

You really don't know how to live it up do you!
SIGFPE
[ Parent ]
Oh, i could. (none / 0) (#25)
by AnalogBoy on Thu Apr 25, 2002 at 02:30:48 AM EST

I would have freakin asci blue in my livingroom. my new livingroom. in my new house. on my new island.

I'd also have Toravalds, Stallman, Rob Malda, and Raymond imprisoned under said island.

I'd have Fred Phelp's drawn and quartered. Slowly, in a bath of lemon juice. And i'd pay the state to do it.

And that's what i'd do for $50 billion.

[Life is so beautiful when you're coming off of your psychotropics.]



--
Save the environment, plant a Bush back in Texas.
Religous Tolerance (And click a banner while you're there)
[ Parent ]
How much do you want to bet... (3.80 / 5) (#14)
by DeadBaby on Wed Apr 24, 2002 at 04:06:43 PM EST

It was all devoted to getting Mozilla to hit RC1?


"Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity -- in all this vastness -- there is no hint that help will come from elsewhere to save us from ourselves. It is up to us." - Carl Sagan
It's Official (4.66 / 3) (#19)
by 90X Double Side on Wed Apr 24, 2002 at 05:46:09 PM EST

AOL has officially issued their results for Q1 2002, which you can read here. AOL had a loss of $1 million ($0.00 per diluted share) before the asset accounting change, and reduced the valuation of it's assets by $54 billion in accordance with the accounting change.

“Reality is just a convenient measure of complexity”
—Alvy Ray Smith
Unsurprising (5.00 / 6) (#20)
by gibichung on Wed Apr 24, 2002 at 05:51:51 PM EST

Look at how the competition has fared since AOL Time-Warner was valued at a vastly inflated $290 billion in Jan. 2000. Market Capitalization:

Yahoo:

Dec. 23, 1999: 097 Billion
Apr. 21, 2002: 008 Billion

Cisco:

Dec. 23, 1999: 353 Billion
Apr. 21, 2002: 113 Billion

Sun:

Dec. 23, 1999: 070 Billion
Apr. 21, 2002: 029 Billion

Amazon was once valued at $60 billion, but has settled in at around $5 billion. I don't think I need to remind anyone here of Redhat or VA Linux's histories. Although I'm not really familiar with the media industry, I can point out that many of the big players haven't fared too well over the last 2 years, either. Look at some of the entertainment companies:

Sony has taken a big hit from $86 billion in Dec. 1999 to 48 billion today, though it isn't entirely a media company. Vivendi has taken a similiar downward turn in the last year, though this is usually attributed to their recent acquisitions. Viacom remains steady in the last year. Although many of these media companies have grown in the last 2 years, I'm not qualified to say how Time Warner would have fared against them.

So, what's the pattern? "Internet" companies have taken the last 2 years hard, while media companies have seen limited growth or stagnation. It just confirms exactly what was always suspected: AOL was smart to grab a "real" company while they were grossly over-valued. Time Warner hasn't lost any of the market-share that made them valuable; they're holding AOL up. I'm not an economist, so take my interpretation with a grain of salt and feel free to point out any corrections.

-----
"No man is above the law and no man is below it; nor do we ask any man's permission when we require him to obey it." -- Theodore Roosevelt

Loss (5.00 / 2) (#27)
by rusty on Thu Apr 25, 2002 at 04:00:03 AM EST

They're not talking about the value of the company dropping by $50 billion, they're talking about losing $50 billion in one quarter on the earnings sheet. Big difference.

According to the LA Times article, AOL/TW's market cap has dropped by $205 billion in the past two years.

____
Not the real rusty
[ Parent ]

Yah (5.00 / 1) (#28)
by gibichung on Thu Apr 25, 2002 at 04:48:04 AM EST

They're not talking about the value of the company dropping by $50 billion, they're talking about losing $50 billion in one quarter on the earnings sheet. Big difference.
I know that. I suppose I wasn't completely clear, but I was just addressing the article's question:
the cost of the stock has slid horrifically since the merger: a combined value of $290 billion at the time of the merger has become $85 billion now. Did AOL suck the life from Time Warner, or was the Great Economic Correction to blame for this?
My point was that it isn't surprising that the stock has fallen, because neither "Internet" nor "Media" companies have been very successful in the last 2 years. I was trying to provide some perspective to what seem like staggering numbers.

The "$290 billion" quoted was 2/3 AOL. Not to mention the 20% or so jump that Time Warner's stock made between announcement and the merger. Time Warner, by itself, was only worth $100 billion.

-----
"No man is above the law and no man is below it; nor do we ask any man's permission when we require him to obey it." -- Theodore Roosevelt
[ Parent ]

The "loss" was based on stock value (none / 0) (#32)
by isdnip on Thu Apr 25, 2002 at 11:35:04 AM EST

The reason that AOL posted a huge loss was because of a change in accounting rules. Net profit and loss includes the change in the value of some corporate assets. In particular, an asset called "goodwill" is the way they book the price of an acquired company's stock above the acquired company's book value. So when AOL bought T-W, they booked tons of "goodwill".

Under a rule that took effect recently, companies have to reflect the loss of goodwill when it happens, not over 20 years. So the stock market's devaluation of stock means that the implicit "goodwill" really has nothing to back it up. So they have to show it as a loss.

EBITDA more accurately reflects current cash flow.

[ Parent ]
RIAA aside... (4.00 / 1) (#21)
by gnovos on Wed Apr 24, 2002 at 06:09:15 PM EST

I find it interesting that AOL can lose more money in three months than an entire industry is worth, but still the government feels justified in protecting the smaller fry.

A Haiku: "fuck you fuck you fuck/you fuck you fuck you fuck you/fuck you fuck you snow" - JChen
Similar Losses ahead? (5.00 / 3) (#24)
by Dolohov on Wed Apr 24, 2002 at 11:39:40 PM EST

As has been pointed out before, most (all?) of the $54 Billion is a one-time loss because of the devaluation of their stock over the last few years. I'm not entirely sure how that works, but this is apparently a recent change in the way corps are supposed to report earnings and losses, and this large loss is cumulative of previous quarters.

That said, I expect AOLTW to continue to lose money. My reason for saying this is mostly from looking at the way it's being run right now. They don't have a clue how to run a company like this. None at all. There are so many different kinds of businesses rolled into this thing, each with its own needs, and the top executives can't help but be pointy-haired about it -- with so many businesses under one roof, they can't help being in charge of at least one operation that they don't know much about. The whole thing seems to have been built under the premise that corporations benefit from diversification the same way stock portfolios do, and I think that they're just plain wrong. The best companies I've seen were the ones that went with the philosophy to "Do one thing, and do it well" while keeping an eye open for other things that they know they can do well. AOLTW is the absolute antithesis of that, and I think that's why it'll continue to do poorly.

Anyone see.. (4.00 / 1) (#26)
by AnalogBoy on Thu Apr 25, 2002 at 02:33:07 AM EST

Even MORE BigCompany[tm] layoffs coming up? I know i certainly do. Now i may not even be able to afford an internet connection into my cardboard box, with the additonal burden on Unemployment Insurance.


--
Save the environment, plant a Bush back in Texas.
Religous Tolerance (And click a banner while you're there)
This is a pattern for AOL (5.00 / 1) (#29)
by Sawzall on Thu Apr 25, 2002 at 04:57:40 AM EST

They have taken big write downs for different accounting treatments many times. Revenue recognition seemed to be the big one last time if my memory is correct. Either that or marketing expenses. I forget since they have done it so much.

Time Warner got fair value - that side of the business sucks really bad too given the lack of ad demand. CNN is sucking in a really big way with dropping ratings along with dropping ad rates and time buys. Almost makes me feel bad for Ted Turner (right).

Viacom is holding up because of Mel. He refused to jump into the trendy things like webcasting his radio stations since he rightfully saw that there was no revenue model. He is sitting on making the push to IBOC for his radio stations since he does not see a revenue stream worth the hundreds of thousands of dollars required per station to make the change for his more than 1K stations. He didn't panic when rates and bookings dumped - he didn't do a fire sale of his inventory like most of the other networks.

Pro Forma accounting is just another way to lie with a straight face.

To put this in perspective (4.00 / 1) (#34)
by hengist on Thu Apr 25, 2002 at 08:44:10 PM EST

US$50 billion, at the current exchange rate, is roughly equal to New Zealand's annual governmental budget. In other words, you could run my country for an entire year on what they lost in three months.

There can be no Pax Americana
AOL/TW loses $50 billion in a quarter. | 35 comments (21 topical, 14 editorial, 0 hidden)
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