It was only briefly noted deal this week but the transaction tells us more about the madness of markets in the past decade than any other deal in recent times.
The sale by Google of a 5 per cent stake in AOL in fact manages to capture the lunacies not only of the latest bubble, but before that, the tech and net bubbles and bust at the turn of the century.
The values established in this transaction also tells us much about the stupidities of corporate managers and their advisers, and how no-one should take deal-making seriously, except as a means of bolstering balance sheets and executive pay.
So what was the deal?
This week Time Warner revealed that it had bought back the 5 per cent of AOL Google had purchased in 2005. The buyback price was $US283 million, or around $US717 million lower than the $US1 billion or so that Google had paid.
Now, even a company as legendary as Google has now become for business smarts, that’s a horrible loss and shows that even the clever clogs of technology are duds when it comes to valuing and assessing the worth of competitors.
It also illustrates the collapse in market values for every sector of the US economy since the credit crunch and recession started.
But there’s another more striking illustration that emerges from this one transaction — at $US283 million, Google and Time Warner effectively valued AOL at around $US5.6 billion, which is a tidy sum.
But the 2005 transaction put a value of $US20 billion on AOL, which at the time seemed fine, seeing Microsoft was an under bidder for the stake. So Google wasn’t alone, was in good company and had the misfortunate to be successful.
The loss in value was more than 3 times the amount paid, or well over $US14 billion.
But this latest deal also underlines, quite clearly, the case for again calling the 2000 merger between Time Warner and AOL the most foolish deal ever done.
Remember back in those heady days of the millennium, the Sydney Olympics were approaching, the world was flying high? Time Warner proposed what was sold as the deal of the century, with synergies galore and cross-platform possibilities that stretched all the way to the horizon and then some.
And the value of this “merger”? $350 billion, with AOL acquiring Time Warner for $US164 billion in paper and valuing itself at around $US183 billion.
Now, nine-and-a-half-years later, AOL is worth just $US5.6 billion with over $US178 billion in value gone. It’s far worse than what Merrill Lynch or Citibank every did in sub-prime mortgages, but the difference is that it was all paper value, inflated by the giddy madness of the times and the boastful ambitions of the executives and boards involved.
Of course AOL has been sliced, restructured and sliced again to cut costs and boost returns by Time Warner, so a comparison on that basis isn’t strictly compatible, but it’s enough to remind us of the foolishness of both the tech and net booms and finally the easy credit bubble that’s now imploding.
All those economists, investment bankers, brokers, accountants and others who justified the absurdly high valuations in both bubbles have been exposed as fools and charlatans who took huge fees and compensation, and left investors, creditors and others with hundreds of billions of dollars of losses, real or on paper.
Keep this in mind when you hear company executives and their advisers justifying takeovers.
Time Warner is spinning-off AOL later this year: the Google deal means it has 100 per cent of AOL to sell to shareholders and has effectively set a value for the market to compare.
Time Warner survived because of the strength of its old fashioned TV, film and publishing assets which were derided back in 2000 as being so “old”. Now, even though publishing is in deep trouble, Time Warner will report a profit this Friday for the second quarter, including one for AOL (it made money in the first quarter), because of some old fashioned business discipline has been applied to it at long last.