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By callisto2
May 13, 2002

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

1. "Ordinary people go to jail for stealing a few miserly bucks from a store. Steve Case gets to buy a 22,000 acre farm in Hawaii for stealing 54Billion dollars from ordinary people."

Once and for all, this is just silly. I'm tired of seeing this on the MSFT and the AOL boards, so it's time to respond.

Imagine that I have 10 baseball cards, and you have 10 baseball cards. For some odd reason, people on eBay will pay me $1,000 a pop for any baseball card I wish to sell. Yours are fetching $800. Seems perhaps a little high to both of us, but we smile and accept our good fortune.

Together, our baseball cards are worth $18,000. So I go over and make you a deal. I say to you: "Give me all of your cards, I'll give you a 50/50 share of anything I get for the cards from now on. Maybe your Griffey rookie card and my McGwire rookie card together will sell for a higher average price than either card individually."

And you say: sounds good to me.

So I write down in my log book: "paid badsin $8,000" (or maybe $9,000?...I dunno) for his stuff.

(Notice that I did not pay you in cash. I paid you in baseball cards.)

Now we each have a 50/50 share of stuff that might be worth $18,000, or maybe $20,000...we hope.

It then turns out that the price for baseball cards goes to $50 apiece. Our stuff is now worth a measly $1,000.

So I wrote down in my log book: "badsin's stuff is now worth $7,500 less than I thought it was worth."

Looks terrible, right? I "lost" $7,500, right?

Well, let's see. If I hadn't done the deal, I'd have 10 cards worth $50 each, or $500. As it is, I have a half share of 20 cards worth $50 each...or $500.

So where, exactly, is the loss? (One might say: you guys both should have sold all of your cards at the great price...but that's really a separate issue and translated to "AOL should have sold itself to a larger company and run away with the loot.")

People say, "AOL paid too much (in absolute dollars) for Time-Warner". Look at that write-down!!!

The reality is "AOL paid 'too much' (in inflated currency) for Time-Warner." And that is the crucial difference. It's like buying a Steinway with a wheel barrowful of Confederate scrip. "You paid a jillion dollars for a piano! Idiot!" Not really...

If AOL hadn't bought Time-Warner, it would have a 100% share in what used to be called "America Online". Instead, it has about a 55% share in the combination of the old AOL and the old Time-Warner.
Which would be worth more? Most people today would say: the latter.

So AOL's books have to include this notion of "losing" $54 billion when that's just a bad way to look at the situation. It's not like they put $54 billion in actual cash in a pile and burned it.

Put concisely: even a small decline in AOL Time Warner's stock price after the merger would have (well, could have) shown up someday as a write-down. So if the stock price had declined, say, 1% after the merger, would everyone have run around proclaiming that AOL had "lost $1 billion" or whatever? Only people who don't understand accounting at all.


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