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AOL/Time Warner and WorldCom:Corporate Governance and the Effects of the Deregulation Paradox
Unformatted Document Text:  16 America Online Acquires Time Warner Inc. On January 10, 2000, America Online (AOL), the largest Internet service provider in the U.S. announced that it would purchase Time Warner Inc. for $162 billion. What was particularly unique about the deal was that AOL with one fifth of the revenue and 15% of the workforce of Time Warner was planning to purchase the largest TNMC in the world. Such was the nature of Internet economics that allowed Wall Street to assign a monetary value to AOL well in excess of its actual value. What is clear, however, is that AOL President, Steve Case, recognized that his company was ultimately in a vulnerable position. Sooner or later, Wall Street would come to realize that AOL was an overvalued company. At the time, AOL had no major deals with cable companies for delivery. Instead, it was dependent on local telephone lines and satellite delivery. Nor did it have any real content to speak of. Enter Time Warner which has both. The proposed venture was promoted as the marriage of old media and new media. In principle, an AOL/Time Warner combination would provide AOL with broadband distribution capability to Time Warner’s 13 million cable households. AOL/Time Warner cable subscribers would have faster Internet service as well as access to a wide variety of interactive and Internet software products (“Showtime,” 2001). In the end, the AOL Time Warner merger may well be remembered as one of the worst mergers in US corporate history. The first signs of trouble occurred in the aftermath of the dotcom crash beginning in March 2000. AOL, like most other Internet stocks, took an immediate hit. AOL’s ad sales experienced a free fall and subscriber rates flattened out. By 2001, AOL/Time Warner stock was down 70% (“AOL, You’ve Got Misery,” 2002).

Authors: Gershon, Richard. and Alhassan, Abubakar.
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16
America Online Acquires Time Warner Inc.
On January 10, 2000, America Online (AOL), the largest Internet service

provider in the U.S. announced that it would purchase Time Warner Inc. for $162 billion.

What was particularly unique about the deal was that AOL with one fifth of the revenue

and 15% of the workforce of Time Warner was planning to purchase the largest TNMC

in the world. Such was the nature of Internet economics that allowed Wall Street to assign

a monetary value to AOL well in excess of its actual value. What is clear, however, is that

AOL President, Steve Case, recognized that his company was ultimately in a vulnerable

position. Sooner or later, Wall Street would come to realize that AOL was an overvalued

company. At the time, AOL had no major deals with cable companies for delivery.

Instead, it was dependent on local telephone lines and satellite delivery. Nor did it have

any real content to speak of. Enter Time Warner which has both. The proposed venture

was promoted as the marriage of old media and new media. In principle, an AOL/Time

Warner combination would provide AOL with broadband distribution capability to

Time Warner’s 13 million cable households. AOL/Time Warner cable subscribers would

have faster Internet service as well as access to a wide variety of interactive and Internet

software products (“Showtime,” 2001).
In the end, the AOL Time Warner merger may well be remembered as one of the

worst mergers in US corporate history. The first signs of trouble occurred in the aftermath

of the dotcom crash beginning in March 2000. AOL, like most other Internet stocks, took

an immediate hit. AOL’s ad sales experienced a free fall and subscriber rates flattened out.

By 2001, AOL/Time Warner stock was down 70% (“AOL, You’ve Got Misery,” 2002).


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