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AOL Time Warner Merger
◼examine a famous merger case
◼describe the unique valuation issues
surrounding mergers/acquisitions
AOL Time Warner Merger
◼what business is each company in?
◼what are the synergies between them?
◼other motives for mergers in general?
Who brought what to the table?
America Online
“Merger Facts”
◼for each share of TW stock, get 1.5 shares of
new AOL stock. This much is clear!
◼pre-merger and pre-announcement
◼TW has 1301.5M shares, trading at $64.75
◼AOL has 2255M shares, trading at $72.88
market’s reaction to announcement
◼TW stock increases from $64.75 to $90
◼AOL stock decreases from $72.88 to $72
Should the stock price change when
a firm issues new shares of stock?
◼Firm’s assets etc. worth $20 and 1 share
outstanding.
◼Issue 1 additional share for $20.
Salomon Smith Barney
evaluation of 1.5 exchange ratio
creating value by issuing over-
valued stock
◼Suppose intrinsic value of AOL was $35.43/share
◼78020 MktVal /2201.8 shares in eVal = $35.43/share
