IN PICTURES: Digging Out Of Debt In 8 Steps
Back in 2000, the two companies gushed at the deal's potential. "The value of this merger lies not only in what it is today but in what it will be in the future," said one executive of the merged company. "We believe that AOL Time Warner will provide companies worldwide with a convenient, one-stop way to put advertising and commerce online, as well as take advantage of the best in traditional marketing."
Time Warner Won't Own Any Of AOL Post Spinoff
Nine years later, Time Warner shareholders received one share of the new AOL for every 11 shares of Time Warner that they own. Time Warner will not own any of AOL post spinoff. This is a little unusual as many companies keep ownership of a part of their former business, due either to tax or strategic reasons.
When Cardinal Health (NYSE: CAH) spun out CareFusion Corp. (NYSE: CFN), its healthcare products division in September, it retained 19% of the company for disposition later.
The company is already off to a shaky start as Standard & Poor's said that AOL would not stay in the S&P 500 index after the spinoff. Analysts estimate that this would result in the net sale of approximately 5 million shares of AOL by index managers that can't own the stock.
The historical financials of the stand-alone AOL are not encouraging. Revenue has been declining for several years, from $8.6 billion in fiscal 2004 to $4.2 billion in fiscal 2008. This decline is coming mostly from its subscription business.
The New AOL Business Model
It is AOL management's intent to convert the company from its historical subscription-based business model to one that emphasizes content and earns most of its income from advertising. The company will also coordinate content created by thousands of freelancers at a new site called Seed.com. AOL does have admirable goals for its future, but there are problems.
AOL does not have its own search engine; it licenses its search function from Google (Nasdaq: GOOG). Search advertising revenues are currently 33% of its total advertising segment revenues, which were about $2 billion in fiscal 2008. This agreement with Google expires soon, and the impact on revenues for AOL of any renegotiation is unknown.
Another problem is that although AOL recognizes that its access or subscription business is in a rapid decline and is attempting to move to a content model, a large part of its traffic to its various portals comes from its subscribers that log on. Therefore, as its subscriber base declines, so too might its traffic. Stated another way, if an AOL subscriber switches to another provider, will that person remain loyal to AOL and head over to its website?
Bottom Line
The Time Warner spinoff of AOL is complete, and AOL no longer has Time Warner's revenues to support it. AOL has its work cut out for it as the company transitions to a new business model, as the Internet is a sharp-elbowed business where everyone tries to create content to drive traffic to its sites. (Learn more about the historic AOL-Time Warner merger in Biggest Merger and Acquisition Disasters.)
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