AOL-Time Warner
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By howardroark
January 30, 2003

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Looks like we found someone more willing to blame AOL for the disappointment of this merger than CNBC. In one of the most self-deprecating corporate moves I've ever seen, AOL appears to have written itself off today.

In taking its second $45b plus write down this year in Q4, AOL again allocated the brunt of its value diminution to the AOL division. In Q102, when it did its SFAS 142 assessment, AOL didn't technically taken an impairment to the AOL division, it just started from scratch and "reallocated" its goodwill according to its estimate of FMV, including the impact of its $54b write down. At the time, AOL was left allocated $28b of goodwill, in addition to the $6b of book assets it already had, leaving $34b as the "valuation" assigned to the AOL unit. That itself was fairly big kick in the head, seeing as how AOL was valued at around $180b at the time the acquisition priced, which closed on a year earlier. So AOL, which got 55% of the valuation at the time of deal, had dropped to around 25% of the value of the enterprise by its own estimate.

But today takes the cake. Of the additional $45b write down AOL took in Q4, it allocated a whopping $33.5b of that to the AOL unit, leaving total assets of only $7.7b allocated to AOL, including just $2.8b of goodwill. That allocation reduces AOL to just 6.7% of the value of the enterprise. But it gets worse. AOL (the company) added $8.5b to the AOL division's asset base (mostly goodwill) this year when it had to acquire AOL Europe in Q1 02. If you include this incremental investment, you can say the original AOL unit has now been written off entirely: $7.7b in current allocated value versus $8.5b in incremental interim investments. Of course, it's silly to say that the current AOL unit is actually worth zero as it's producing significant if declining free cash flow. However, if you include the significant AOL Europe off balance liability borne by the original AOL, then by the logic of the company's latest impairment, that liability was enough to offset the entire value of AOL, rendering the unit worthless. Of course, this ignores the interim cash flow produced by the unit, but that cash flow is barely enough to make up for the technically negative value AOL is now assigning to its former self, still leaving you with essentially a zero valuation for the piece of the company that received 55% of the equity.

Pittman and Case going is one thing, but writing yourself off is what I call cleaning house. How long before we see TWX on the NYSE again?

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