Hey fellas, know how when your girlfriend becomes an ex-girlfriend, and her true colors come out, the way that makes you hate all women for a while?
That's how the stock market feels about AOL/TimeWarner. It has become the whipping boy for all of the hype and idiotic promises made during the dotcom hysteria.
If you look at the fundamentals there is no reason on planet earth why this companies stock price should hovering around ten dollars a share.
And before we go any further, AOL/TW is not going to file bankruptcy. A stock price often reflects the financial health of a company, like American Airlines which is buried so deep in debt that it is on the verge of bankruptcy. But this isn't one of those times.
Last year AOL/TW lost four billion on revenues of 45 billion, and most of that was from a change in accounting rules that forced a lot of companies to change the valuation of something called "goodwill". Their revenues are down not because of AOL, but because of a slump in advertising spending that has hit the TimeWarner half of the company very hard. Not enough to cripple the company, however, and it shouldn't be enough to force the share price down to $12. Viacom, another media conglomerate with similar holdings, hasn't seen its stock price suffer nearly as much. Neither has GE, which has extensive media holdings through NBC and RCA.
The depressed stock price becomes especially confusing if you look at the AOL side of the business. Ad revenue has fallen for the ISP. But AOL makes money and has survived intense competition from other ISP's. Their customers are remarkably loyal. They haven't moved into broadband, but neither has MSN and broadband providers haven't exactly set the stock market on fire. Most that were in business two years ago aren't today.
So what gives? Steve Case showed incredible moxie when he announced AOL, not even twenty years old, was buying one of the oldest and largest media companies. He also did little to hide the arrogance in his voice when he talked up the synergies of the deal, how the "new media" would make the "old media" more profitable and vice-versa. He also did this just as the internet stock market bubble was launching on his final upward surge.
Case put himself, and his company, in a spot where if they didn't change the world and make more money than God in the process, the investors who bought AOL/TW stock would turn on them. Hard.
And that is what happened. AOL/TW is the biggest and best-known of the companies who inhaled the internet smoke. Investors are pounding their stock price like the posterchild that it is, despite the underlying fundamentals of their business. The company doesn't have a lot of debt, has the best-known brands in their businesses, strong customer loyalty, and when the ad market turns around it will make money by the gigabuck. The promised synergy hasn't worked, but the attempt hasn't crippled either side of the business.
But it won't do so together. My fearless prediction is that the AOL/TW merger is undone by the end of 2004. I also think a lot of people ten years from now will wince when they remember when the price was only $12. Intel at $18 won't make them feel good, either.
BHD