Case Analysis Of America Online-Time Warner Merger

In 2000, the merger between America Online (AOL) and Time Warner (TW) wasfamous for the hugest transaction value in the history. But three years later, it hasbecome the most classic example of failed merger cases. Is it true that the "centurymerger" is a mistake? What is the reason of failure on earth? We try to analyze thecase and answer the question in our viewpoint, and we hope it can provide someexperiences and ideas to the managers, who are doing merger business.Basing on the description of the pre-merger situation, merger process andpost-merger track of the combined company, we analyze the external and internalpromoting factors of this merger. And then, we focus on the core problem of thecase—how did they value the combined company and decide the stock exchangeratio. We evaluate the combined company and pre-merger companies by DiscountCash Flow method, Comparable Companies method and Residual Income Model.We also analyze the rationality of stock exchange ratio. We find that both ofcompanies are overvalued at the time of merger, and the America Online are moreovervalued than the Time Warner. By analyzing the management, finance andshareholders' benefit, we can conclude that the failure of combined company mainlybecause the overvaluation of AOL. The overvaluation also leads the post-mergercompany to a wrong way.The structure of the whole report is as follow:In part one, we describe the pre-merger situation of AOL and TW respectively, thendisclose the external and internal promoting factors of the merger. In part three, weintroduce the process of merger and post-merger track of combined company, andwe also do the evaluating analyses of company and exchange ratio in this part. Wegive out the reason and the influences of overvaluation in part four. Finally weconclude the experiences that will be beneficial to our country's merger and acquirebusiness.