The amputation is nearly complete. Time Warner (NYSE:TWX) will spin off its struggling America Online unit on Dec. 9. The once-mighty Internet service provider will begin trading under the AOL ticker symbol the following day.
Shareholders will receive a single share of AOL for every 11 shares of Time Warner that they currently own.
Take a moment to ponder that exchange ratio. When AOL acquired Time Warner eight years ago, the former was considered the more valuable of the two media giants. The merged company was AOL Time Warner, but it carried the AOL ticker symbol that's now being dusted off for a second run.
Now, eight years later, AOL is one-eleventh of the company that Time Warner has become, and that's assuming that AOL's stock is trading at a similar price to Time Warner today. Under a scenario of similar prices, AOL's market cap would be less than $4 billion.
Should Time Warner have unloaded AOL sooner? Absolutely. There were Microsoft (NASDAQ:MSFT) buyout rumors five years ago, shortly after AOL's access business peaked.
A year later, Google (NASDAQ:GOOG) paid $1 billion for a 5% stake in AOL. This doesn't imply that Google would have paid $20 billion for all of America Online, since Google made the investment to secure advertising rights. However, Microsoft or Yahoo! (NASDAQ:YHOO) may have very well been willing to pay that much to keep Google from growing its reach at the time.
There probably won't be much excitement over AOL's return to the market next month. Unlike recent IPOs that have come out smoking, AOL is on a cold streak. Its revenue and operating income fell by 23% and 50% respectively in its latest quarter.
The company now hosts just 5.4 million access subscribers. Online advertising was supposed to save the day, but ad revenue took an 18% hit during the quarter.
How did Time Warner let AOL come to this sorry state? It could have sold off the Internet access business to Earthlink (NASDAQ:ELNK) or United Online (NASDAQ:UNTD), and divested AOL's online sites and platforms to a handful of traffic-hungry dot-coms.
There is always the hope that AOL will be reinvigorated as a stand-alone company. It has raided Google and Yahoo! for key executives, and it'll be able to take more chances outside of Time Warner's old media umbrella.
Still, Time Warner can't be given a free pass here. The company took way too long to do the right thing.
How can AOL regain its former glory? Post your thoughts in the comment box below.
