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    Valuing the AOL Time WarnerMerger

    Presented By:

    Muhammad Awais

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    Introduction

    On January 10, 2000,Steve Case, CEO and chairman ofAmerica Online (AOL), and Gerald Levin, CEO andchairman of Time Warner, announced the merger.

    Merger would combine:

    AOLs extensive Internet franchises, technology andinfrastructure

    With

    Time Warners vast array for world-class media,entertainments, and new brands and its technologyadvanced broadband delivery system.

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    Introduction . . . Continued

    On March 1, 2000, analyst estimated:

    AOL Time Warner

    Present Value $92 per share $138 per share

    Target Value $102 per share $154 per share

    Estimated Value of Combined CompanyApprox. $500 billion

    Table:

    Merger created vertically integrated Company: Stretched across industries,economic models, and geographic boundaries.

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    Introduction . . . Continued

    On June 11, 2001, deal closed and the world economyhad slowed.

    AOLs stock price had dropped from $72 at the time

    the deal was announced to $47 per share.

    Time Warners stock price had declined from $90 pershare to $71.

    This case enables the analysts to analyze the challengeswhich executives may face to define and executestrategy during a period of uncertainty and change.

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    AOL (Pre-Merger)

    Launched in 1985 as an online information servicenamed Quantum Computer Services.

    Renamed as America Online in 1989.

    AOL services: Access to e-mail, games, special interestcommunity forums, etc.

    AOL Partnership: American Airlines for travel reservationservices and CNN for online News and stock quotes.

    In 1990, AOL began innovative marketing techniques:Free copies of AOL software and several months ofsubscription.

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    AOL (Pre-Merger) . . . Continued

    In 1994, AOL launched World Wide Web.

    During 1997, AOL launched new services like InstantMessaging and Buddy Lists.

    Membership exceeded 10 million in same year.

    By December 2000, company was the worlds leader in

    interactive services, web brands, internet technology,and electronic commerce services.

    In December 2000, AOL employed 15000 employees.

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    AOL Business Model

    Interactive Services: Included AOL.com (27 million members),CompuServe (3 million members), and Netscapes Netcenter (40million users), also on Mobile.

    Interactive Properties: Provided online services also on partner and

    competitors websites like Digital City,ICQ (

    Instant Messaging andChat), Moviefone (Online Movie Guide), spinner. COM, Winamp,

    etc.

    AOL International: Provided access to country specific versions ofAOL.com within 16 countries outside the United States. 33% userswere outside the united states.

    Netscape Enterprises: Provided software products, technicalsupport, consulting, and training services for business users.

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    Time Warner (Pre-Merger)

    In 1918, Henry Luce and Britton Hadden conceived the idea of Timemagazine.

    During the same year, Warner Brothers were developing their firstmoving picture studio on sunset Boulevard in California.

    By the 1980, Time Inc. and Warner Brothers had become leaders intheir respective industries.

    During that period each company extended its business model byintroducing new products and by acquiring complementary

    businesses.

    In 1969, Warner Brothers acquired its first broadcast network andrenamed as Warner Communications.

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    Time Warner (Pre-Merger)

    In 1978, the company acquired its first Cable operator.

    In 1989, Time Inc. and Warner Communications merged.

    In 1996, Time Warner acquired Turner BroadcastingGroup which had been founded in 1976.

    By late 2000, Time Warner had become World Leader inmedia, entertainment, news and information delivery,and broadband infrastructure.

    The Company had over 70000 employees.

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    Time Warners Business Model

    Cable Networks(24% of revenue, 25% of EBITDA): CNN,TBS superstition, TNT as well as HBO and emergingnetworks like the Cartoon Network.

    Cable Systems(19% of revenue, 40% of EBITDA): TimeWarner Cable was the second largest cable systemoperator with 6.5 million subscribers. Also ownedRoadrunner broadband service.

    Filmed Entertainment(30% of revenue, 14% of EBITDA):Leader in Creation, distribution, licensing, and marketingof movies, T.V. programming, Videos, etc.

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    Time Warners Business Model

    Music (Warner Music Group)(12% of revenue, 9% ofEBITDA): WMG was marketing US artists overseas andcreating greater global marketing opportunities for artistswith worldwide appeal.

    Publishing(15% of revenue, 12% of EBTIDA): Includecreation and distribution of publishing and informationbrands.Brand Name Magazines, and Book Clubs.

    Digital Media: Included the Companys integratedinternet-related and digital media businesses includingEntertain Dom (Web Portal).

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    Reasons For Merger

    For Warner, merging with an existing company was a more effectiveway to distribute its contents via online channels as opposed to

    building its own capabilities.

    AOL needed a strategy for moving its customers forward into theworld of high-speed "broadband" access, controlled by telephone

    companies and cable TV operators (such as Time Warner).

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    Transformational

    Opportunities

    Strategic Options

    Tactical Synergies

    AOL- Time Warner Strategic Opportunities

    Redefine the entertainment and mediaindustries to accelerate and exploit theconvergence of T.V., radio, telephone,

    print, and computer technologyindustries.

    Enhance the development andgrowth of existing businesses and

    services

    Identified over 1$ billionincrease in Value during the

    first calendar year.

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    Concept

    Value

    Capabilities

    RevenueModel Cost

    Model

    AssetModel

    Linking Strategy to Value

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    The Deal

    Time Warner would be converted into 1.5 shares of anidentical series of AOL Time Warner stock.

    AOL stock would be converted into one share of AOL Time Warner stock.

    AOL shareholders ended up owning approx. 55% of AOLTime Warner.

    Time Warner shareholders owned approx. 45% ofcombined entity.

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    Deal Announced:January 10, 2000

    Deal Closed: January11, 2001

    Stock Price

    Market Value of theCompanies

    AOL: $167 billion

    Time Warner: $124 billion

    AOL: $107 billion

    Time Warner: $98 billion

    Percent Shareholderownership

    Common stock toConversion Ratio

    1 AOL Share: 1 AOL Time Warner Share

    1 Time Warner share: 1.5 AOL Time Warner share

    Cost of Walking awayfrom Deal

    AOL: $5.4 billion

    Time Warner: $3.5 billion

    0

    20

    40

    60

    80

    100

    AOL Time

    Warner

    Stock Price

    72 90

    0

    10

    20

    30

    40

    50

    60

    70

    80

    AOL Time

    Warner

    Stock Price

    4771

    T. W.

    45%

    T. W.

    43%

    AOL

    55%

    AOL

    57%

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    Valuing th AO Time WarnerMerger:

    The View in Spring 2000

    Salomon Smith Barney (SSB) analysts attempted to consolidateAOL-Time Warner 2000 Financial matrices.

    Gerald Levin described three sources of revenue and cash flow forthe combined company:

    Subscriptions (cable service, cable network, and magazinesubscribers revenues): 27% gross margin in 2000 - Steady sourceof revenue and cash flow.

    Content (filmed entertainment, music, and book publishing

    revenues): 13% gross margin in 2000 - Expected to provideaccelerated, long-term growth in revenue and cash flow.

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    Valuing the AO Time WarnerMerger:

    The View in Spring 2000

    Advertising/E-Commerce (advertising and e-commerce revenues):35% gross margin in 2000 - These activities would leverage thehighly predictable and powerful signal of growth.

    Revenue Pr d

    ucing Synergies

    :

    Advertising/E-Commerce: Generate $9 Billion and an additional$290 million to $360 million in EBITDA by leveraging itsonline/offline distribution and sales infrastructure in 2001.

    Subscriptions:Additional $30 million to $40 million in EBITDA bycross-marketing.

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    Valuing the AO Time WarnerMerger:

    The View in Spring 2000

    Content:Additional $60 million to $72 million in EBITDA.

    Cost Saving Synergies:

    Reduction in marketing costs by 10% to 15%, yielding and additional$230 million in EBITDA.

    Save additional $125 million by Shutting down its digital media unit.

    Elimination in corporate overhead services (e.g., finance, legal,

    human resources) were anticipated to save up to $100 million in2001.

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    Valuing the AO Time WarnerMerger:

    The View in Summer2001

    Merger was finalized on January 12,