Aol Time Warner Merger Analysis
...crosoft and how they instead issues shares of stock, but we did not want to bear the opportunity cost of issuing shares to raise equity. Decided to go with performance-based stock program. o Group / Division bonuses not only base bonuses on the accomplishment of individual division goals, but on the achievement of the whole companys goals. This way, employees bonuses are based on how the whole company performs, so theyre going to want the company to do well and possibly be more encouraging toward other departments to achieve their goals. Increase Communication among stakeholders o Its common in a merger atmosphere that employees will feel anxious, so one of the keys to success is confronting the fears and insecurities of employees head-on and integrating as rapidly as possible. (provide a good workplace) o Example: merger of Sopheon PLC and Teltech Resource Network Corporation Management kept employees informed by answering questions and posting information regularly on the corporate intranet. Employees were encouraged to send in questions and comments. A facilitator routed each question to the appropriate respondent, made sure it was answered and published the responses online. We found this to be an excellent means of transferring knowledge between the two merging companies. But posting large volumes of data on the intranet wasnt enough. Surveys revealed that only 20% of all employees understood the new corporate strategy By the end of the event, 97% said they had achieved a clear understanding of the merger strategy, according to the company survey. o In addition to easing fears of the merger, important in general. Since employees will have a vested interest in the company, they will be interested to know whats going on, and possibly happier; may make them feel like they are part of something bigger increase loyalty and pride; also important for employees to know where the company is headed. o Share information with shareholders WEAK POINT; work on!!! Make it public knowledge of where the company wants to go and the changes they are planning on taking, so that investors know whats going on, maybe have renewed strength in the company Restructure corporate governance o Help reinforce innovation! Bring in new people with an unbiased view who is not from either AOL or Time Warner and dont have previous bias toward one company or the other o As of 2003, the BOD had 10 directors, The Board needs to increase the number of executive members on the board. According to the company by-laws, there should be no fewer than 12 directors. The new members should be able to offer innovative and creative views of where the company should be headed and provide strong strategic leadership to make Time Warner more competitive with is core competencies and should remain true to the companys fundamental values. The new members should be independent from the company, but be familiar with the industry to offer insight into the direction of the company. Possibly several younger members to provide a different perspective. Obviously, they should exhibit the qualities expected of all directors: integrity, judgment, acumen, and the time and ability to make a constructive contribution to the Board. Consistent with Integrity, Diversity, and Responsibility Values 2. Debt Management AOL Time Warners growth strategy is through acquisitions and mergers as evidenced by their past. To grow and acquire more companies and assets, money is required. To finance the growth, they incurred significant amount of debt. As seen when we look at their financial / liquidity ratios: Debt Reduction Program 2003 Net debt reduction to $22.7 billion through strong free cash flow generation and the sale of assets. During 2003, the Company sold certain businesses and non-strategic assets, including all of the Warner Music recorded music, music publishing and CD and DVD manufacturing businesses, the Time Life Inc. direct marketing business, the Companys 50%- interest in Comedy Central and its interest in Hughes Electronics Corporation. Sold Time Life and Winter Sports Teams. (in millions) Net Debt at December 31, 2002 . $25,779 Debt assumed in the TWE Restructuring 2,100 Debt incurred to repurchased preferred securities of AOL Europe .. 813 Debt assumed upon adoption of FIN 46 . 712 Free Cash Flow .. (3,536) Proceeds from sale of investment in Comedy Central . (1,225) Proceeds from sale of investment in Hughes . (783) Proceeds from sale of Music Manufacturing . . (1,050) All other, net . (105) Net Debt at December 31, 2003 .. $22,705 Cash Flows 2001 2002 2003 Operations 5,281 7,032 6,601 Investing (5,257) (10,460) 77 Financing (1,915) 4,439 (5,368) Increase (Decrease) in cash equivalents (1,891) 1,011 1,310 Cash and Equivalents at Beg of Period 2,610 719 1,730 Cash and Equivalents at End of Period $719 $1,730 $3,040 FCF 2001 2002 2003 Cash provideed by operations $5,281 $7,032 $6,601 Capital expenditures and product development costs (3,621) (3,229) (2,887) Dividends paid and partnership distributions (63) (11) --- Principal payments on capital leases --- (61) (178) Free Cash Flow 1,597 3,731 3,536 Less: Free Cash Flow from discontinued operations (100) (242) (224) Free Cash Flow from continuing operations $1,497 $3,489 $3,312 AOL Time Warner Comcast Current Ratio 0.96 0.56 Quick Ratio 0.78 0.51 Financial Leverage 2.07 2.62 Debt / Equity Ratio 0.4 0.65 Free Cash Flows utilizes FCF to evaluate the performance of its businesses. Free Cash Flow is cash provided by continuing operations less capital expenditures and product development costs, principal payments on capital leases, dividends paid and partnership distributions. FCF is considered to be an important indicator of the companys ability to reduce debt and make strategic investments. 3 Options for managing the debt: 1. Issue more shares of stock to increase equity 2. Conduct a profitability analysis to assess the companys core competencies and the profitability and potentia...