The verdict is finally in: The AOL Time Warner (AOL) merger should not have happened.
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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.
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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.