- The verdict is finally in: The AOL Time Warner merger
should not have happened.
-
- That's the message from last week's latest balance sheet
convulsion to shake what was once known reverentially in certain parts
as the House Of Luce.
-
- Specifically, the balance sheet net worth of the largest
media conglomerate on earth has now been slashed by more than one-third
in a biblical-sized tidal wave of losses, even as the man who presided
over the drowning - Mr. Gerald M. Levin - heads for the exit door, a $1
million per year "consulting" contract stuffed in his
briefcase.
-
- His new mission, after trading the crown jewel of the
American media for $95 billion worth of dot-com hype? To reconnect with
his feminine side and "write poetry" as he eases into early
retirement.
-
- What a colossal disgrace, topped only by the pathetic
efforts of the company's brass to spin the fiasco - which amounts to the
largest balance sheet evisceration in American corporate history - as
nothing
more than a kind of accounting hiccup that affects nothing.
-
- No, I don't think so. The charge-off in question - which
removes $54 billion in balance sheet goodwill from the company's books
- amounts, in effect, to a complete repudiation of whatever sense may have
once been thought to lurk in the January 2000 merger of America Online
and Time Warner Inc. in the first place.
-
- That deal began as a so-called "merger of
equals"
at the absolute zenith of the dot-com craze on Wall Street. But then the
tech bubble popped and the market began relentlessly collapsing before
the dumb-struck stares of both sides to the deal.
-
- In the end, what began as a stock swap wound up, as an
outright takeover of Time Warner by America Online.
-
- We may assume that the folks on the Time Warner side
of the deal thought they were driving a tough bargain by insisting that
they receive one and a half shares of America Online for each share of
Time Warner in the takeover.
-
- But Time Warner was simply exchanging a valuable asset
(its own shares) for stock in the world's largest and over-priced
collection
of dot-com hot air. (America Online).
-
- Save for the monthly subscription revenue, there was
nothing much to the AOL business to begin with, as the first mild downturn
in the economy has convincingly shown, with advertising revenues from the
service having now collapsed in a heap.
-
- Finally last week, after more than fifteen months of
bloodletting that has knocked 60 percent off the price of the combined
companies' stock, the company announced that it was writing off $54 billion
of its net worth as being completely unsaleable and without any value
whatsoever.
-
- In fact, there's more of this certainly to come because
the slide in the company's stock price since the merger has wiped out more
than $160 billion of the company's market value, whereas last week's
write-off
has only thrown $54 billion of it into the trash bin.
-
- In other words, perhaps as much as $100 billion more
could disappear before the carnage is complete.
-
- There's a very good reason to look at the matter this
way, too, since the real value in AOL Time Warner is not in the business
as an operating entity but in its assets.
-
- You can get as much of a return by investing in a U.S.
government bond these days as you can from throwing your money into the
AOL Time Warner black hole.
-
- When viewed as a going concern, the company appears as
little more than a lumbering behemoth that is infested with divisional
rivalries and is creaking with debt and unable to generate more than
sporadic
fits of earnings growth.
-
- This is the only public company I know of that is so
organizationally con-fused that it includes an actual flow chart in its
financial filings to the Securities and Exchange Commission, to show
investors
the various interrelationships and lines of reporting authority within
the organization. Eighteen separate fiefdoms appear on the chart,
suggesting
a kind of private-enterprise version of the Defense Department.
-
- The company's overhead costs to support all this is
staggering.
Before the merger, overhead consumed 6 percent of America Online's
revenues.
But this was swamped in the incredible 27.4 percent of revenues consumed
by the folks at Time Warner, with the result that post-merger, the combined
entities now devour 25 percent of their revenues to pay for
overhead.
-
- Did you know, for example, that AOL Time Warner, at
latest
tally, has nearly 13 million square feet of office space on its books?
That is twice the entire square footage of the Pentagon, recognized to
be the largest office building on earth.
-
- And folks, we're not even including that sprawling, 2
million-square-foot office complex now under construction at Columbus
Circle,
which will be one-third the size of the Pentagon all by itself. The
company's
books and records are so convoluted and confusing it is utterly impossible
to identify the specific items of junk that still exist on the books of
the combined companies and that need to be written off.
-
- Before the merger, America Online's Netscape browser
business was broken out in financial filings as a separate operating
segment
so you could see its performance within the company. Now it's buried within
AOL, and its performance is no longer visible.
-
- The company's financials are so fogged up with pro forma
projections and "trending schedules" that it is impossible even
for their own financial spokesmen to answer questions about what's
what.
-
- When I asked the company to explain specifically what
assumptions and methodology were used to derive last week's $54 billion
write-off number, and what specific assets were being written down, no
one could answer the question.
-
- What's going to happen next is anybody's guess. The
company's
new CEO, Richard Parsons, who is replacing the terrible Levin, is clearly
playing an earnings management game, intentionally low-balling his
estimates
for the company's performance in 2002 in apparent hopes of getting a bounce
in the stock down the road.
-
- No reputable economist now doubts that the economy is
in fact recovering from last year's mini-recession and will expand for
the remainder of the year. This means AOL Time Warner's own earnings are
almost certain to improve also, probably at just about the rate the economy
itself improves.
-
- Yet last week Parsons set himself up to look like a hero,
telling the company's analyst meeting that AOL Time Warner was assuming
no recovery in the economy this year at all.
-
- The next day, the Commerce Department reported that the
country's gross domestic product grew 5.8 percent in the first
quarter.
-
- Wall Street no longer seems to be buying these stunts.
The company's stock has been falling since March, when it was selling for
$28 per share.
-
- Last week it closed down every day but Wednesday, and
by week's end had fallen to a closing low of $18.72, the lowest level for
the shares in more than three years.
-
- With revenues slumping in the company's film and online
operations and basically flat in publishing and music, only the cable
operations
are showing growth - and Time Warner was into cable long before AOL came
along. So, it is no wonder investors are not impressed.
-
- What was the point of this merger anyway, except maybe
to build an unnecessary 2 million-square-foot office tower in Columbus
Circle, and launch a burned-out CEO on his new career as a poet! How sad.
- ___
-
- NEW YORK POST is a registered trademark of NYP Holdings,
Inc. NYPOST.COM, NYPOSTONLINE.COM, and NEWYORKPOST.COM are trademarks of
NYP Holdings, Inc. Copyright 2001 NYP Holdings, Inc. All rights reserved.
http://www.nypost.com/business/4
6726.htm
|
