Case 3.3 THE AOL ACQUISITION OF TIME WARNER (TWX)
C3.3.1 Merger announcement date: January 7, 2000
Share Price Number of Shares (in billions) Market CapPremerger (in billions)
AOL 72.88 × 2.6 = $189.5
TWX 64.75 × 1.4 = 90.7
Total = $280.2
New AOL shares for TWX stockholders = Exchange Ratio × TWX shares
= 1.5 × 1.4 billion
= 2.1 billion
Share Price Number of Shares (in billions) Market Cap Post-Merger
“TWX” $72.88 × 2.1 = $153.1
AOL $72.88 × 2.6 = $189.5
Total 4.7 = $342.6
What was the premium paid by AOL for TWX?
C3.3.2 The value of AOL on September 10, 2002, was $13.36, and the number of shares outstanding was 4.45 billion. What was the decline in value of AOL from its immediate post-merger market capitalization?
C3.3.3 Explain the pro forma accounting adjustments (except for the miscellaneous items) as an example of purchase accounting.
Debit (in billions)
TWX shareholders’ book equity $ 10.0
Other miscellaneous adjustments, net (30.9)
Goodwill and other intangibles 174.0
Total pro forma debit adjustments $153.1
Credit (in billions)
AOL common stock at par issued to pay for TWX $ 0.1
Addition to AOL paid-in capital 153.0
Total pro forma credit adjustments $153.1
C3.3.4 Calculate the percent of goodwill and other intangibles to total assets for AOL and for TWX premerger and for the pro forma combined company post-merger. Discuss.
C3.3.5 Calculate the percent of total liabilities and of shareholders’ equity to total assets for AOL and for TWX premerger and for the pro forma combined company post-merger. Discuss.