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AOL/Time Warner and WorldCom:Corporate Governance and the Effects of the Deregulation Paradox
Unformatted Document Text:  11 by a number of important mergers and acquisitions, including: WorldCom’s purchase of MCI Communication for $36.5 billion in1997 and America Online’s purchase of Time Warner for $162 billion in 2001 (Compaine & Gomery, 2000). The goal, simply put, is to possess the size and resources necessary in order to compete on a global playing field. A Word About Financing Issues The transnational corporation, like any other firm, needs to be able to invest in new product development as well as engage in potential mergers and acquisitions when and if it is deemed appropriate. To accomplish this, a company may finance the project venture by means of a capital market loan. Capital market loans generally come in two varieties; equity loans or debt loans. An equity loan is made when a corporation sells stock to investors. A stock offering enables individual investors to purchase shares. A share of stock gives its holder a claim to a firm’s profit stream. Investors purchase stock in anticipation of gains in the price of stock as well as possible dividends issued by the company. The money the corporation raises in return for its stock issuance can be used to leverage a merger or acquisition strategy. The problem occurs when there is a serious drop in stock value during the negotiation period. Suddenly, the acquiring or acquired company is no longer worth what it once was. In contrast, a debt loan involves borrowing money from a financial lender. Banks, investment firms, and other financial institutions will loan money using the borrowing firm’s assets in order to secure the loan. If the firm’s assets are not used as collateral, the lender may provide an unsecured loan at a higher interest rate. The length of the loan determines whether it is short, intermediate or long term debt. Short term

Authors: Gershon, Richard. and Alhassan, Abubakar.
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11
by a number of important mergers and acquisitions, including: WorldCom’s purchase of

MCI Communication for $36.5 billion in1997 and America Online’s purchase of Time Warner
for $162 billion in 2001 (Compaine & Gomery, 2000). The goal, simply put, is to possess
the size and resources necessary in order to compete on a global playing field.

A Word About Financing Issues
The transnational corporation, like any other firm, needs to be able to invest in new

product development as well as engage in potential mergers and acquisitions when and if it

is deemed appropriate. To accomplish this, a company may finance the project venture by

means of a capital market loan. Capital market loans generally come in two varieties;

equity loans or debt loans. An equity loan is made when a corporation sells stock to investors.

A stock offering enables individual investors to purchase shares. A share of stock gives its

holder a claim to a firm’s profit stream. Investors purchase stock in anticipation of gains in

the price of stock as well as possible dividends issued by the company. The money the

corporation raises in return for its stock issuance can be used to leverage a merger or

acquisition strategy. The problem occurs when there is a serious drop in stock value during

the negotiation period. Suddenly, the acquiring or acquired company is no longer worth

what it once was.
In contrast, a debt loan involves borrowing money from a financial lender.

Banks, investment firms, and other financial institutions will loan money using the

borrowing firm’s assets in order to secure the loan. If the firm’s assets are not used as

collateral, the lender may provide an unsecured loan at a higher interest rate. The length

of the loan determines whether it is short, intermediate or long term debt. Short term


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