At its height, the combined AOL and Time Warner (NYSE:TWX) company market capitalization exceeded $350 billion. When AOL used its big, bloated equity to buy Time Warner, the company offered Time Warner shareholders a 70% premium to the closing price of their shares to make the deal seem sweet.
And a sweet deal it was -- for AOL. Under the terms of the merger, AOL shareholders received 55% of the combined company. But even though there had been rumblings from folks like Howard Schilit for years that there was plenty of humbuggery going on in the way AOL reported its financial performance, Time Warner's executives gleefully accepted the merger deal back in 2000 when it really did seem like the Internet was going to crush other types of media.
Question: do you think that in the intervening four years since the merger that AOL has contributed 55% of the intrinsic value of the company? OK, maybe that's not a fair question. How about this one: has AOL contributed 5%?
What many suspected then, and what we know beyond a shadow of a doubt now is that AOL's financial performance in the late 1990s was bolstered not only by aggressive accounting (capitalizing marketing costs, for example), but by outright fraud. The SEC has investigated over the last two years, and the Justice Department has announced that AOL would pay $210 million over charges that it had abetted securities fraud, and that the company had offered to pay another $300 million to settle civil charges against the company.
$500 million dollars. That's a great deal of money. But if you add up the amount of damages that shareholders have suffered from peak to today due to wrongdoing at AOL, it doesn't even make a dent. We're talking hundreds of billions of dollars, evaporated, both from AOL, which presented a false picture of itself to shareholders, who bid up the price, and to those of Time Warner, who basically accepted the equivalent of Weimar Republic scrip -- currency that has a lot of zeroes on it, but wasn't worth very much.
In some ways, though, these SEC fines and sanctions on companies have very bad aim. The people who were in charge at AOL are long gone, sipping mai tais in exotic places: they've made their money and, unless criminal or civil charges drop on them personally, they're not going to have to give it back. And fines on companies get paid not by some company superaccount but from, you guessed it, shareholder equity. Those are the same shareholders who were harmed in the first place by company shenanigans, who bought into a myth. It's not clear what else the SEC could do: if it does not punish companies, the incentive to cheat would be even larger.
But since the announcement of penalties comes so long after the commission of the fraud, the SEC tends to penalize a set of executives who had little to do with the wrongdoing, and may have even been brought in to clean things up. Getting individual sanctions is extremely tough, witness last week's rejection of a recommendation at the SEC to bring civil charges against former Global Crossing (NASDAQ:GLBC), so is completing actions against companies in a speed necessary to bring the hammer down on the people who were in charge when the laws were broken in the first place.
As for the current management at Time Warner, they profess to want to conclude things with regulators so that they can once again tap the equity market for currency for acquisitions and other capital needs. I'm sure this is right. The company also has to face a number of shareholder lawsuits. This time, it seems that the claims in the suits aren't frivolous, but once again, folks who are party to the suit and still hold the shares are essentially suing themselves and not the people who perpetrated the fraud.
So in the answer to the question posed in the title: half a billion dollars probably isn't enough, but it's also way too much.
Bill Mann owns none of the companies mentioned in this article.
