How Much Has AOL Really Cost Time Warner?
By Andy Serwer

(FORTUNE Magazine) – What a short strange trip it's been! Four years have now passed since Time Warner and AOL announced their merger (Jan. 10, 2000, will be forever seared into my brain), and the anniversary seems an appropriate time to check up on my place of employ (Time Warner is the parent of FORTUNE's publisher).

All kinds of things have transpired at ol' TWX over those four years: We've had two CEOs (never mind an heir apparent who became unapparent), two name changes, and back-and-forthing over the company's stock ticker symbol. Five books have been--or are being--penned about the deal. There are at least two ongoing federal investigations and some 40 shareholder lawsuits. And we've gone from using Ebita to Ebitda to Oibda as our financial benchmark. (Don't ask--I won't tell.)

And yes, there's been some good news too. Time Warner is about to sell its struggling music business. That will help reduce its heavy debt load to around $20 billion, down from $25.8 billion at the start of 2003. The company is nearing completion of its blockbuster new headquarters in Manhattan. (Cost to Time Warner: $1 billion.) And the stock has outperformed the rising market over the past year.

Oh, and excuse me! I buried the lead, as they say in my biz. The company is actually earning a profit! Yup, $638 million in the latest quarter and more than $2.6 billion for all of 2003. Sadly, though, in what has become typical for this company, the numbers in its quarterly report are unduly complex and have caused confusion on Wall Street. Which is probably partly why the stock was giving back some of its gains in late January.

Still, TWX's stock had climbed enough recently off its 52-week low of $9.90 to achieve a milestone of sorts. A financially minded acquaintance pointed out to me that with Time Warner's stock closing at a recent price of $17.57, the company's market capitalization was up to $76,439,341,326. What is so significant about that? Well, on Jan. 7, 2000, the last trading day before the AOL merger was announced, Time Warner's market capitalization stood at $75, 912, 718, 635. That's right! The company today is worth almost exactly the same as it was before it joined forces with AOL!

It gets worse. Consider that AOL back then had a bubble-inflated worth of nearly $165 billion. So the value of the two companies totaled about $240 billion. (Again, remember that TWX today is worth about $76 billion.) That means an amount equal to the whole value of premerger AOL is up in smoke. Truly staggering.

Now let's dig deeper to see how badly TWX shareholders have been fleeced. Remember that even though the market caps of Time Warner today and Time Warner four years ago are almost identical, there's a key distinction. Whereas in 2000, TWX had 1.2 billion shares outstanding, today it has 4.4 billion. The company's quarterly profit of $638 million breaks down to 15 cents a share in earnings. But if the 2000 version of the company had made $638 million, it would have earned 54 cents a share. Big difference.

And finally, think about this: When AOL and Time Warner were combined, Time Warner shareholders got 1.5 shares of the new AOL Time Warner for every share of TWX that they owned. Still, because AOL had so many more shares, Time Warner stockholders ended up with just 44.76% of the new company. (Of course, that was how the deal was set up.) That means the shares of the original Time Warner stockholders have a claim on only 44.76% of the company's current $76 billion market cap, or $34,214,249,178. So in 2000, shareholders of TWX had $76 billion, while today only $34 billion belongs to the TWX crowd. Whew!

It's true that Time Warner shareholders can toast the fact that yes, the company is in fact turning a real, honest-to-God (well, let's hope it is) profit. And company employees can now traipse through one of the most expensive buildings on the planet. But the debilitating and sobering effects of the merger from hell should still never be far from their minds. Or their wallets.