Mergers and Acquisitions – The deal of the century

While reading Robert Frank’s ‘The Return Of The Economic Naturalist – How Economics Helps Make Sense Of Your World” I came across his comments on the AOL/Time Warner merger in January 2000

http://www.robert-h-frank.com/PDFs/NYT.1.11.00.pdf

In Frank’s book he claims its the worst piece he’d ever written. This is probably a sensible statement given that the story proclaims the virtues of the $147 billion merger.

The following story in Dec 2009 brings the curtain down on the whole saga as the companies de-merge with combined total market values of  around $38 billion.

http://www.informationweek.com/news/internet/ebusiness/222001597

The scale of the numbers are staggering. No other words for it. $100 billion of shareholder value lost in the space of 10 years in two companies.

The vast majority of the losses were attributable to AOL. At the time of the merger AOL shareholders held 55% of the combined company giving a market value of $80 billion. When spun off in 2009 AOL was valued at $2.5 billion.

Time Warner at the time of the merger was worth a mere $66 billion and when spun off was valued at $36 billion.

The fallacy around the deal was the dot com bubble of the year 2000. When everything Internet related had turned to gold and there were few concerns about valuations far exceeding the industry norms. The hope was Internet access combined with entertainment content was a one way bet. It turned out it was, except it went the wrong way.

We are now speculating that we have returned to another Internet bubble with incredibly high valuations for technology IPOs and acquisitions.

How do we spot a bubble? I think we just need to look out for the next AOL / Time Warner style merger.

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