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AOL/Time Warner and WorldCom:Corporate Governance and the Effects of the Deregulation Paradox
Unformatted Document Text:  14 Financing and the problem of excessive debt. One of the most important reasons that mergers sometimes fail is the result of the bidders paying too much for the said acquisition. The acquiring company is afflicted with what some economists call “winner’s curse.” In the desire to make the deal happen, the acquiring company winds up paying too much, thereby, invalidating any financial benefit. A related problem has to do with financial debt. In order to finance the merger or acquisition, some companies will assume major amounts of debt through short term loans. If or when performance does not meet expectations, such companies may be unable to meet their loan obligations. The said company may be forced to sell off entire divisions in order to raise capital, or worse still, default on their payment altogether. In the end, excessive debt can prove highly destabilizing to the newly formed company. AOL/TIME WARNER The company that was once known as Time Inc. has been a party to three major business combinations since 1989. In July 1989, Time Inc. and Warner Communications completed a corporate merger that would made it the largest media company in the world. The Time Warner merger was conceived as a global strategy that would enable the company to compete head-to-head with the world's leading media companies. At the time, company strategists believed that by the year 2,000 there would be an international oligopoly of six or seven transnational media corporations (Saporito, 1989). That prognostication has in fact proven true. Both companies were highly complementary in their assets. Time Inc. brought to the merger agreement such notable magazines as Time, Life, People, Fortune, Money and

Authors: Gershon, Richard. and Alhassan, Abubakar.
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14
Financing and the problem of excessive debt. One of the most important reasons that

mergers sometimes fail is the result of the bidders paying too much for the said acquisition.

The acquiring company is afflicted with what some economists call “winner’s curse.”

In the desire to make the deal happen, the acquiring company winds up paying too much,

thereby, invalidating any financial benefit. A related problem has to do with financial debt.

In order to finance the merger or acquisition, some companies will assume major amounts

of debt through short term loans. If or when performance does not meet expectations, such

companies may be unable to meet their loan obligations. The said company may be forced

to sell off entire divisions in order to raise capital, or worse still, default on their payment

altogether. In the end, excessive debt can prove highly destabilizing to the newly formed

company.
AOL/TIME WARNER
The company that was once known as Time Inc. has been a party to three major

business combinations since 1989. In July 1989, Time Inc. and Warner Communications

completed a corporate merger that would made it the largest media company in the world.

The Time Warner merger was conceived as a global strategy that would enable the company

to compete head-to-head with the world's leading media companies. At the time, company

strategists believed that by the year 2,000 there would be an international oligopoly of six or

seven transnational media corporations (Saporito, 1989). That prognostication has in fact

proven true.
Both companies were highly complementary in their assets. Time Inc. brought to

the merger agreement such notable magazines as Time, Life, People, Fortune, Money and


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