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." Become a Complete Fool
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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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."
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