Aol Merger with Warrner
The Time Warner and AOL merger
Hélder Salvador de Albuquerque
Master of Science in Finance Project
Supervisor:
Professor Alberta Di Giuli, Assistant Professor, ISCTE-IUL Business School, Finance Department
29th of April, 2011
The Time Warner and AOL merger
Abstract
The corporate world has experienced Merger movements since the beginning of the XX century when the first wave of Mergers & Acquisitions occurred. These Merger movements always represent intent from companies to take advantage of existing market opportunities or leverage the competitive position of the combined company, always with the final objective of creating value for the shareholders. The Merger between Time Warner and AOL occurred in 2000 and represented the combination of a Media and Entertainment Conglomerate (Time Warner) with a company operating in the Internet segment (AOL) that was experiencing some outstanding growth. The present Case Study tries to firstly identify the situation of the Media and Entertainment Market and its major segments at the time of the Merger, including the positioning of both companies as well as its motivations to merge. The terms of the deal are analyzed through a Free Cash Flow to the Firm (FCFF) valuation of both companies at the time of the Merger that leads to the conclusion that they were overvalued and the price paid was too high. The Merger analysis was complemented with a Market Multiples overview of both companies and an assessment of the Stock Market reaction on the announcement of the Merger that showed the lack of ability of the Market to take a clear view of the full impact of this M&A movement.
Key words: Free Cash Flow to the Firm (FCFF), Market Multiples, Merger, Stock Market JEL Classification: G30; G34
ii
The Time Warner and AOL merger
Resumo
O mundo empresarial tem assistido a movimentações relativas a processos de Fusão desde o início do século XX, aquando da ocorrência da 1ª vaga de Fusões & Aquisições. Estas
Hélder Salvador de Albuquerque
Master of Science in Finance Project
Supervisor:
Professor Alberta Di Giuli, Assistant Professor, ISCTE-IUL Business School, Finance Department
29th of April, 2011
The Time Warner and AOL merger
Abstract
The corporate world has experienced Merger movements since the beginning of the XX century when the first wave of Mergers & Acquisitions occurred. These Merger movements always represent intent from companies to take advantage of existing market opportunities or leverage the competitive position of the combined company, always with the final objective of creating value for the shareholders. The Merger between Time Warner and AOL occurred in 2000 and represented the combination of a Media and Entertainment Conglomerate (Time Warner) with a company operating in the Internet segment (AOL) that was experiencing some outstanding growth. The present Case Study tries to firstly identify the situation of the Media and Entertainment Market and its major segments at the time of the Merger, including the positioning of both companies as well as its motivations to merge. The terms of the deal are analyzed through a Free Cash Flow to the Firm (FCFF) valuation of both companies at the time of the Merger that leads to the conclusion that they were overvalued and the price paid was too high. The Merger analysis was complemented with a Market Multiples overview of both companies and an assessment of the Stock Market reaction on the announcement of the Merger that showed the lack of ability of the Market to take a clear view of the full impact of this M&A movement.
Key words: Free Cash Flow to the Firm (FCFF), Market Multiples, Merger, Stock Market JEL Classification: G30; G34
ii
The Time Warner and AOL merger
Resumo
O mundo empresarial tem assistido a movimentações relativas a processos de Fusão desde o início do século XX, aquando da ocorrência da 1ª vaga de Fusões & Aquisições. Estas