America Online's takeover of Time Warner is in the books as the biggest corporate acquisition ever. ...
America Online's takeover of Time Warner is in the books as the biggest corporate acquisition ever.
Its value was $187.1bn when the deal between the largest internet service provider and the largest media company was announced a year ago. When the deal was announced are the telling words. By the time the deal closed this month, the value had declined by 39% to $115bn. Chagrined Time Warner shareholders who initially dreamed of getting $110.63 in AOL stock for each of their Time Warner shares had just $69.71 worth on 12 January when the takeover was completed. On 23 January the value was $81.23.
The stock market's come-uppance in recent months has undone other investors who thought takeovers were giving them eye-popping returns. The cost of the acquisitions simply had been pumped up with inflated stock. Did anyone really believe that Time Warner was worth $187bn? And now the air was being let out.
When the UK's Vodafone took over Germany's Mannesmann, investors salivated. Mobile phones for every ear in the world, and all that. In February 2000, when Mannesmann capitulated, the acquisition was valued at $185.1bn, the second-biggest deal of all time. But by the time the transaction closed last April, a drop in Vodafone shares had reduced the takeover's value to $153.7bn. Since then, the Vodafone shares Mannesmann owners received in the takeover have fallen further. They closed on 23 January at 226p ($3.32) compared with 313p on April 12.
Investors found disaster in another seemingly irresistible area: fibre optics. Last July, JDS Uniphase, the largest manufacturer of fibre-optic products for speeding up telecoms transmission, said it would buy SDL, which makes lasers. Everybody wants data to get here yesterday was the notion. The value of JDS stock offered on the announcement date was $36.5bn. But now, the value of the still-pending takeover has dropped to $19.3bn.
Executives of these firms can say that shareholders should be patient, that in the long run their takeovers will work. They might also point out, sheepishly, that the stocks of the target firms would have declined even if they hadn't been tied to the shares of the acquirers. A decline in wireless phone stocks, including its own, probably means VoiceStream Wireless of the US will go through with its sale to Deutsche Telekom, though a drop in the purchaser's stock might give it an escape route. Initially valued at $49.8bn, this takeover is now worth $35.3bn. VoiceStream shareholders might take some solace in knowing that part of the offer is in cash.
All of these deals were made predominantly in stock because the acquiring companies would have been foolish to pay cash, even if they had been able.
Remember too that just a few months ago, investors were so enamoured of these can't-miss stocks that they probably preferred them to cash. There was this corollary nonsense about spinning off internet or wireless units to create 'currencies' to be used in other overpriced acquisitions. Not every recent takeover has plummeted in value. Chevron's $46.5bn bid for oil rival Texaco is now worth 5.6% less than when it was announced in October. S&P's 500 Index has declined 1% in the same time.
Still, oil was dull compared with the internet and mobile phones. Investors wanted action. What they got was cracked ribs, and their suffering may continue. Does anyone believe Time Warner, which had to pay $1.67bn in interest on its huge debt in the past 12 months, is worth even $115bn? They are called paper profits for a reason.
David Pauly via the Bloomberg New York newsroom
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