Financial Crisis în a Company - AOL and Time Warner

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Publicat de: Ernest Maftei
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Profesor îndrumător / Prezentat Profesorului: Dutescu Adriana

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BACKGROUND

Time Warner Inc. is a leading media and entertainment company, whose businesses include interactive services, cable systems, filmed entertainment, television networks and publishing. Among its subsidiaries are AOL, Home Box Office (HBO), New Line Cinema, Time Inc., Time Warner Cable, Turner Broadcasting System, The CW, Warner Bros. Entertainment, Cartoon Network, and CNN.

History:

-Time Inc. was incorporated on November 28, 1922 in the state of New York. Trading of its common stock on the New York Stock Exchange began on April 29, 1964, under the symbol TL. Prior t-that date, the common stock was traded over the counter.

-Time Inc. merged with Warner Communications Inc., on January 10, 1990, t-form Time Warner Inc.

- America Online became a publicly traded company on the NASDAQ on March 19, 1992, at an original price of $11.50. Adjusting for stock splits, this is an IP-price of $0.09.

-AOL Time Warner was created through a merger of America Online and Time Warner, which closed on January 11, 2001.

-For fiscal year 2002, the company reported a $99 billion loss on its income statement. In response, the company dropped the "AOL" from its name, thus becoming Time Warner Inc.

-Historic TW Inc (2005-current)

Headquarters: New York City, New York (incorporated in Wilmington, Delaware)

Key people: Richard D. Parsons - Chairman and CEO; Wayne Pace – CFO; Jeffrey L. Bewkes - President and COO

Revenue: $44.70 billion USD (2006)

Employees: 87,000 (2005)

Website: timewarner.com

Time Warner common stock is traded on the New York Stock Exchange, under the symbol "TWX.".

In 2000, a new company called AOL Time Warner was created when AOL purchased Time Warner for US$164bn. The deal, announced on 10 January 2000 and officially filed on 11 February 2000, employed a merger structure in which each original company merged int-a newly created entity. The Federal Trade Commission cleared the deal on December 14, 2000, and gave final approval on January 11, 2001; the company completed the merger later that day. The deal was approved on the same day by the Federal Communications Commission, and had already been cleared the European Commission on 11 October 2000. The shareholders of AOL owned 55% of the new company while Time Warner shareholders owned only 45%, meaning that the smaller AOL had in fact bought out the far larger Time Warner. After the merger, the profitability of the ISP division (America Online) decreased. Meanwhile, the market valuation of similar independent internet companies drastically fell. The value of the AOL portion of the company had dropped sharply with the collapse of the Internet boom, in the early 2000s. This forced a goodwill write down, with $100 billion in non-recurring charges. For fiscal year 2002, the company reported a $99 billion loss on its income statement. This was at the time, the largest loss ever reported by a company. In response t-the huge loss in 2002, the company dropped the "AOL" from its name (becoming Time Warner Inc.), and removed Steve Case as executive chairman in favor of Richard Parsons, with AOL remaining a part of the company. Case resigned from the Time Warner board on October 31, 2005. Since the merger, a number of transactions have taken place. In 2004, Time Warner's market capitalization was $84 billion. When the AOL-Time Warner merger was announced in January 2000, the combined market capitalization was $280 billion.

THE SCANDAL IN THE SPOTLIGHTS as time goes by

- The Corporate Scandal Sheet at FORBES.COM, August 26, 2002

Company: AOL Time Warner

When Scandal Went Public: July 2002

Allegations: As the ad market faltered and AOL's purchase of Time Warner loomed, AOL inflated sales by booking barter deals and ads it sold on behalf of others as revenue t-keep its growth rate up and seal the deal. AOL als-boosted sales via "round-trip" deals with advertisers and suppliers.

Investigating Agencies: SEC (Securities and Exchange Commission.); DOJ (Department of Justice)

Latest Developments: Fears about the inquiry intensified when the DOJ ordered the company t-preserve its documents. AOL said it may have overstated revenue by $49 million. New concerns are afoot that the company may take another goodwill writedown, after it took a $54 billion charge in April.

Company Comment: N-comment

Client for the audit firm: Ernst & Young

There was a general perception that there are other accountancy scandals waiting t-be uncovered, which contributed t-the stock market downturn of 2002.

On July 9, 2002 George W. Bush gave a speech about recent accounting scandals that have been uncovered. In spite of its stern tone, the speech did not focus on establishing new policy, but instead focused on actually enforcing current laws, which include holding CEOs and directors personally responsible for accountancy fraud.

- July 2002 – The Scandal Went Public

America Online's accounting practices have been called int-question after a series of articles appeared in The Washington Post in July 2002 detailing unusual techniques that AOL used for booking revenues, including ads sold on behalf of eBay that were treated as revenue for AOL. AOL Time Warner Inc. is standing by its accounting,

- August 01,2002 - The Daily Texan - Justice Department opens probe int-AOL Time Warner

Even if AOL Time Warner isn't charged, the mere fact that its accounting is being scrutinized is hurting its already battered stock. AOL Time Warner's shares fell sharply last week after it disclosed that the Securities and Exchange Commission was investigating how it accounted for several transactions at its America Online unit. AOL Time Warner stock, which is down sharply this year, tumbled 9 percent on July 31, 2002 in heavy trading on the New York Stock Exchange. But investors overall seemed t-shrug off news of another potential scandal, with the Dow, Nasdaq and Standard & Poor's 500 index all posting relatively small losses. The accounting probes come at an especially difficult time for AOL Time Warner and it badly needs t-restore its reputation with investors. Pittman, chief of America Online before the merger, announced his resignation the same day the Washington Post began publishing a series of articles detailing what the news-paper called "unconventional" ways of increasing revenues at AOL. The practices included selling ads t-a British entertainment company in lieu of taking a cash settlement in a legal dispute and booking sales from ads that were sold on behalf of eBay. The transactions occurred between July 2000 and March 2002. AOL has been in trouble for aggressive accounting in the past. In May 2000, the company agreed t-pay a $3.5 million fine t-settle SEC charges that it improperly accounted for costs t-mail computer discs t-potential customers. While the transactions in question at AOL involve just $270 million, a relatively small amount for a company that booked $38 billion in revenues last year, they have alarmed investors and analysts. MCI owner WorldCom, Global Crossing and Enron collapsed amid corporate accounting scandals. And last week, members of the founding family of Adelphia Communications were arrested and accused of looting the company's coffers. Robert Mintz, a former federal prosecutor, said it was normal for the Justice Department t-join the SEC in the early stages of an investigation t-determine whether the case should proceed as a criminal matter.

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