Case 3.3 THE AOL ACQUISITION OF TIME WARNER (TWX)

Case 3.3 THE AOL ACQUISITION OF TIME WARNER (TWX)

C3.3.1 Merger announcement date: January 7, 2000

Stand-Alone Firms

Share Price Number of Shares (in billions) Market Cap Premerger (in billions)

AOL 72.88 × 2.6 = $189.5

TWX 64.75 × 1.4 =   90.7

Total = $280.2

Combined AOL-TWX

New AOL shares for TWX stockholders = Exchange Ratio × TWX shares

= 1.5 × 1.4 billion

= 2.1 billion

Share Price Number of Shares (in billions) Market Cap Post-Merger

(In billions)

“TWX” $72.88 × 2.1 = $153.1

AOL $72.88 × 2.6 = $189.5

Total 4.7 = $342.6

What was the premium paid by AOL for TWX?

C3.3.2 The value of AOL on September 10, 2002, was $13.36, and the number of shares outstanding was 4.45 billion. What was the decline in value of AOL from its immediate post-merger market capitalization?

C3.3.3 Explain the pro forma accounting adjustments (except for the miscellaneous items) as an example of purchase accounting.

Debit (in billions)

TWX shareholders’ book equity $ 10.0

Other miscellaneous adjustments, net (30.9)

Goodwill and other intangibles   174.0

Total pro forma debit adjustments $153.1

Credit (in billions)

AOL common stock at par issued to pay for TWX $   0.1

Addition to AOL paid-in capital  153.0

Total pro forma credit adjustments $153.1

C3.3.4 Calculate the percent of goodwill and other intangibles to total assets for AOL and for TWX premerger and for the pro forma combined company post-merger. Discuss.

C3.3.5 Calculate the percent of total liabilities and of shareholders’ equity to total assets for AOL and for TWX premerger and for the pro forma combined company post-merger. Discuss.