The Telegraph
Since 1st March, 1999
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The huge losses reported by AOL Time Warner in 2002 show that a marriage between the old and the new does not always work

A marriage between the old and the new does not always work. That is the message that comes across from the nearly $ 100 billion worth of losses reported by AOL Time Warner in 2002, the largest annual loss in the corporate history of the United States of America. Since America Online acquired Time Warner in January 2001, AOL has been in trouble and a continuous drop in AOL stock prices over 18 months has wiped out more than $ 100 billion in market value. This write-down of AOL, especially in the fourth quarter, was more than what Wall Street expected, and explains the general sense of consternation, although bad news about the merger was known. Especially because some of the write-down is due to the new accounting rules on goodwill, there is no reason for over-reaction and bad news is hopefully out of the way. Mr Ted Turner has resigned as vice-chairman, although his continued presence on the board is uncertain. Not only did Mr Turner push the merger, but he is also likely to dump his AOL shares and disclaim the financial mess AOL Time Warner faces. Most other senior executives associated with the merger having left, the buck stops with the chief executive, Mr Richard Parsons. If Mr Parsons cannot turn AOL around, Capital Group and other larger share-holders (who ousted the former chairman, Mr Steve Case) will legitimately argue for his replacement. Mr Parsons will, of course, have a task on his hands.

Had it not been for the relative success of Time Warner businesses, the company would have been in worse shape and some AOL businesses (like music and cable television) show signs of plateauing out. Therefore, the existing demand within the Time Warner segment that AOL be junked is likely to increase. After all, AOLís troubles are not completely explained by the new accounting rules on goodwill. For the first time, the number of subscribers (US and global) has also declined. AOL faces problems in adhering to commitments from bank loans and in preserving its investment-grade rating. There are also federal probes on the accounting practices followed by AOL. The company is unlikely to be rehabilitated quickly, a fact that Mr Parsons also admits and there will continue to be question-marks about the proposed merger between CNN and Walt Disney Company.

In the last resort, the failed merger is about the inability to accurately value information, communication and technology companies, with unclear revenue streams and unrealistic valuations. In general, the correction for over-valuation of the ICT sector is understandable and AOL has suffered from this meltdown. This was spliced with corporate misgovernance, questionable accounting practices and disowning of responsibility by senior management, standard practice now in American corporate circles. One should not jump to the conclusion that all marriages between the old and the new are inherently unstable. For example, had it taken place after the ICT meltdown, expectations would have been more realistic. That is the difference between child-marriages and those involving consenting adults.

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