Jan 19, 2000 at 12:00AM
While Jane Fonda carved a niche in workout videos, it is now the investment community that has spent the last week and a half sweating out the mental aerobics.
Is this good? Is this bad? Was the knee-jerk euphoria that shot both stocks up at the open last Monday appropriate or is the gradual erosion since then the bearer of the better dissection?
It's clear that the pessimism has been contagious over the past few trading days. Dim and grim. Bleak and weak. So let's do what Ted Turner, who will own 5% of the proposed AOL Time Warner company, would do when things look dark and dreary -- let's colorize the world. Let's wave a wide brush of cheery pastels and try to make sense of this epic deal. Why not take this scripted romance and see if the two sides can live happily ever after?
The opening credits reveal the real numbers at play. The way the media has been tossing around the data, it's easy to understand why investors are confused. The official announcement provides the basis for some easy calculations. With 1.5 billion in fully diluted shares outstanding, Time Warner (NYSE: TWX) would receive 2.25 billion shares of the new company. AOL closed out the week before the deal was announced at $72 11/16. That values the deal, before all the eventual gyrations at $163.5 billion.
Yesterday, AOL closed at $60 11/16 -- exactly $12 a share lower than when the deal was first announced. The rudimentary, and misleading, analysis takes that $12 and multiplies it by the 2.25 billion shares set to be issued to Time Warner shareholders. $27 billion. That $163.5 billion has now become $136.5 billion.
Bad? No. Worse. The media is missing the big picture. Again. Let's assume that a Time-less AOL would still be worth that same $72 11/16 that it was back during that innocent January 7 weekend. AOL shareholders will receive 55% of the new company. It's the entire AOL Time Warner combined company that is taking the hit -- not just the $27 billion on the Time Warner side but the $33 billion on AOL, too. That $163.5 billion is now actually down to just $103.5 billion in terms of incremental market cap.
Bad? No. Even worse. As of yesterday, the Nasdaq Composite has risen 6.4% since the deal was announced. As a high-tech bellwether, one can imagine that a Time-less AOL would at least rise by that amount -- tacking on another $11 billion in market cap. Therefore pinning an $11 billion shortfall on the AOL-Time Warner sandbag of a deal and we are down to $92.5 billion.
Over? No. Almost. The critics of the merger, calling for AOL to ditch Time Warner at the altar, don't seem to think much of the $5.4 billion that AOL would have to pay if the engagement was called off. While the logic that AOL shares would bounce back and make that up in strides is probably valid, allow me the opportunity to get creative with that throwaway sum and deduct that from the deal -- down to $87.1 billion.
Those who are shaking their heads right now are saying "No!" to Time Warner and willing to walk away at $87.1 billion. That is a price tag of $58 for each fully diluted share of Time Warner. The last time that Time Warner closed below the $58 mark was back in December of 1998. Since then, the value of entertainment content, subscriber eyeballs, and high speed Internet access, has risen dramatically. Time Warner delivers on those fronts.
If you believe that shares of AOL were destined to continue its amazing gains organically, without Time Warner or any other major acquisition, you're entitled to your opinion. If AOL shares were to triple on their own the company would lap General Electric (NYSE: GE) to become the world's largest company behind Microsoft (Nasdaq: MSFT). With just $4.8 billion in sales last year? Don't you think a company could use the content, eyeballs, and access (and $26.8 billion in 1999 revenues) that Time Warner brings to the table?
Sure, Time Warner plunks down some serious debt on that table, too. Heavy enough to rattle the wobbly legs holding up that table actually. But, in light of the merged companies, it would represent just 4% of the market cap -- less than Ted Turner's stake in the new company. Don't tell Jane! It's still not much of a hurdle that combined cash flow or a secondary offering couldn't clear. In the meantime, AOL would be getting substantial downside protection with brands like CNN, Time, HBO and Warner Brothers. Are we so gridiron jaded that we can be enamored with Kurt Warner while despising Time Warner? Wait a minute, that last sentence made less sense than my usual ramblings. Let's bring out the dancing bears.
This market is awfully fickle I think. Today, Microsoft gets blasted, in part, because too much of its estimate-thumping earnings came from investment income. Microsoft, it seems, has too much cash. Time Warner has been blasted because it has too much debt. Listen Goldilocks, pick a chair, pick a bowl a porridge, and eat. Why the flux? Oh, that's right. Every action. Opposite and equal reaction.
It's the plot twist that makes this black and white classic all the more challenging to colorize. Then again, maybe there is a payoff. Today shares of AOL rose $3 3/4, driving our Rule Breaker collection of stocks 3.15% higher. Can the tide be shifting? Do you want in? Time Life operators are standing by.
- Jan 19, 2000 at 12:00AM