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Time Warner Inc (TWX)
Time Warner and AOL to Part Ways after Failed Merger
Today Time Warner announced that it will spin off its entire AOL unit by the end of the year to become its own independent publically traded company. The two merged in 2001 in an effort to combine the internet world and traditional media. Time Warner will need to acquire the 5% of AOL currently owned by search engine giant Google (GOOG: Charts, News, Offers). The resulting outcome will be that Time Warner's 100% ownership of AOL will be spun off to shareholders. What will the new AOL look like after this is over? Does this spinoff mean that the 2001 merger was a failure?
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| Stock Analysis |
In 2001, the AOL and Time Warner merger was praised for its visionary attempt to bring together old media and new media. But that was before the dot com bubble burst and hopes for the giant media conglomerate soon crashed. The stock crashed from a split-adjusted $71 in January 2000 to $8.70 by July 2003. Time Warner's 95% stake in AOL is worth about $6.3 billion today, about $3.4 billion for the advertising business and $2.8 billion for its internet access division according to analysts estimates. With an original cost of $124 billion in 2001, the AOL and Time Warner Merger may become known as one of the biggest failures in history.
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For many years, AOL was primarily known as a dial-up Internet access provider however the company has shifted focus in recent years on the AOL.com portal. Its advertising business operates an online display network that reaches more than 91% of the domestic online audience, but display advertising has been plunging over the past two-and-a-half years. Ad revenue at AOL grew 46% in the third quarter of 2006. By the third quarter of 2007, that growth had narrowed to 13%, and by third quarter of 2008, ad revenue declined by 17% hampered by the recession. In the most recent quarter of 2009, ad revenue plummeted 20%.
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The deal has yet to be approved by regulatory authorities however Time Warner has given some details of how a new AOL will look. AOL will be spun off to shareholders as a completely separate publically traded company. The proposed plan would be tax-free for shareholders. Ex-Google executive Tim Armstrong will be the new CEO as he joined AOL from Google two months ago. There was much speculation that he would take over AOL when it was announced that Armstrong was leaving Google and this announcement confirms those rumors. After the proposed separation is complete, AOL will be focused on growing its Web brands and services, which currently reach more than 107 million unique visitors a month in the US. Armstrong will be faced with the difficult task of increasing ad revenues despite a display advertising market in deep decline.
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"A separation will be the best outcome for both Time Warner and AOL," Time Warner Chief Executive Officer Jeffrey Bewkes said in the statement. "The separation will also provide both companies with greater operational and strategic flexibility." Time Warner will look a bit different too after the separation with a renewed focus on its film and cable-television businesses. Independence for AOL will mean it is able to acquire Web properties with its own stock, pursue transactions for its Internet access business with EarthLink and generally have more freedom to make its own decisions. Time Warner expects the transaction with Google to take place in the third quarter and the final AOL spinoff around the end of the year. Despite gains in early trading, Time Warner shares are nearly flat around noon.
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