The Deal Values Time Warner At About.docx

The deal values Time Warner at about $108 a share, a rich premium over its price of $64.75 a share before Monday. Time Warner shares soared 39 percent on news of the deal, climbing $25.31 1/4 to $90.06 1/4 a share on the New York Stock Exchange. AOL shares fell $1.75 to $72.

That's a big reason for the AOL-Time Warner write-down. The value of merged companies had fallen dramatically since its January 2001 marriage, forcing it to write-down almost half of its current goodwill balance of $127 billion at September 30, 2001. New U.S. accounting rules require companies to quickly account for the "impairment" of assets acquired in mergers. In a takeover, the price a company pays above the market value of the target's assets is carried as "goodwill" on the balance sheet. Under the new rules, that goodwill must be adjusted if the company believes the asset values are worth substantially less. The adjustment is taken in the form of a one-time write-off that amounts to a balance-sheet change, but doesn't affect the company's basic operations.

Goodwill represents how much a deal's purchase price exceeds the book value of the acquired company's assets. Under old accounting rules, companies wrote down such goodwill over several decades. But under new accounting rules -- the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 142 -- companies have discontinued the amortization of such goodwill. This is how AOL Time Warner arrived at the $54 billion charge: When the AOL-Time Warner deal was announced two years ago, the goodwill involved in the transaction was valued at $128 billion, based on AOL's $67 share price. Today, because of market uncertainty, the weak state of the economy and AOL Time Warner's lower projected cash flow for the indefinite future, its goodwill is worth about $74 billion. The difference in the value in goodwill is $54 billion.

Why so many? Call it a bunch of drunken sailors nursing a hangover. When AOL and Time Warner first decided to merge, the dot-com love affair was raging and the stock of the combined companies was worth $290 billion, mostly thanks to the price of AOL. By the time the stock-swap deal closed a year later, the bubble had burst, AOL was back on earth, and even though AOL had technically been the acquirer (thanks to that high stock price), the new AOL Time Warner suddenly had a relative lemon on its hands. The new rule was originally going to require companies to post such losses as a relevant part of its continuing operations — which is hard to argue with when the asset is in the company's name — but businesses successfully lobbied to have the losses classified under "cumulative effects of changes in accounting principles." And now, even though they've got the rest of the year to do it, many companies are looking to get it out of the way while their excuse — the rule change — is still fresh in investors' minds.

Upon adoption of FAS 142 in the first quarter of 2002, AOL Time Warner recorded a noncash charge of approximately $54 billion to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected as a cumulative effect of accounting change in the accompanying consolidated statement of operations. The FAS 142 goodwill impairment is associated solely with goodwill resulting from the Merger. The amount of the impairment primarily reflects the decline in the Company’s stock price since the Merger was announced and valued for accounting purposes in January of 2000.