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AOL/Time Warner and WorldCom:Corporate Governance and the Effects of the Deregulation Paradox
Unformatted Document Text:  19 leaving employees, investors and consumers questioning his motives as well as having to sort through the unintended consequences of that action. 1 In the aftermath of the AOL/ Time Warner merger, the company’s new board has overseen a dramatic shake-up at the senior executive level, including Levin’s retirement from the company and Pittman’s forced resignation in July 2002 (“Failed Effort,” 2002). In their place, company directors installed Richard Parsons as CEO and two longtime Time Warner executives as his co-chief operating officers. CORPORATE MISCONDUCT A basic assumption of welfare economics is that such players are expected to engage in rational self-interest. In principle, business and individual employees are said to engage in rational self-interest when they pursue legitimate goals without considering the full effect on third parties (Baumol, 1952). An important aspect of the problem concerns the question of externalities; that is, the effects of a voluntary transaction between two parties on third parties. The pursuit of rational self-interest can have both intended and unintended consequences (Wallis & Dollery, 1999). A scandal involving corporate misconduct such as the falsification of an earnings report can have a devastating effect on the company’s standing and reputation in the marketplace. The lack of investor confidence can translate into billions of dollars in lowered stock value and the loss of working capital. In the worst case scenario, it can lead to a variety of marketplace failure outcomes. 1 As of October 25, 2002, AOL is preparing a second major writedown of AOL/Time Warner merger. The writedown for goodwill which is the amount a company pays for an asset above its value is estimated between $20-$30 billion. The previous writedown reflects the declining value of the company. When the merger was announced in 2000, the deal was valued at $165 billion. By the time it closed in January 2001, however, the value had dwindled to $110 billion. Now, based on current stock prices, the market values the company at about $66 billion.

Authors: Gershon, Richard. and Alhassan, Abubakar.
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19
leaving employees, investors and consumers questioning his motives as well as having

to sort through the unintended consequences of that action.
1
In the aftermath of the AOL/

Time Warner merger, the company’s new board has overseen a dramatic shake-up at the

senior executive level, including Levin’s retirement from the company and Pittman’s

forced resignation in July 2002 (“Failed Effort,” 2002). In their place, company directors

installed Richard Parsons as CEO and two longtime Time Warner executives as his

co-chief operating officers.
CORPORATE MISCONDUCT
A basic assumption of welfare economics is that such players are expected to

engage in rational self-interest. In principle, business and individual employees are said

to engage in rational self-interest when they pursue legitimate goals without considering

the full effect on third parties (Baumol, 1952). An important aspect of the problem concerns

the question of externalities; that is, the effects of a voluntary transaction between two

parties on third parties. The pursuit of rational self-interest can have both intended and

unintended consequences (Wallis & Dollery, 1999). A scandal involving corporate

misconduct such as the falsification of an earnings report can have a devastating effect on

the company’s standing and reputation in the marketplace. The lack of investor confidence

can translate into billions of dollars in lowered stock value and the loss of working capital.

In the worst case scenario, it can lead to a variety of marketplace failure outcomes.
1
As of October 25, 2002, AOL is preparing a second major writedown of AOL/Time Warner merger.
The writedown for goodwill which is the amount a company pays for an asset above its value is estimated
between $20-$30 billion. The previous writedown reflects the declining value of the company. When the
merger was announced in 2000, the deal was valued at $165 billion. By the time it closed in January 2001,
however, the value had dwindled to $110 billion. Now, based on current stock prices, the market values
the company at about $66 billion.


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