Sunday, November 29, 2009

Capital Depreciation Fund - Nice Trades!

"Almost 10 years ago, in January, 2000, America Online CEO Steve Case announced one of the boldest, craziest ideas in modern business history: a $182 billion stock-and-debt deal to buy mighty Time Warner, creating an Internet and media colossus with a combined market cap of $350 billion. It was the largest takeover ever, and a symbol of the turn-of-the-millennium power of the Internet. "Together, they represent an unprecedented powerhouse," Bear Stearns analyst Scott Ehrens told CNNfn at the time. "If their mantra is content, this alliance is unbeatable."

Well, as it turned out, that wasn't even close to true. Almost a decade later, Bear Stearns is gone, and so is CNNfn. Steve Case quit as AOL Time Warner chairman in January 2003, and left the board for good in 2005. A few weeks ago, he sold a company called Revolution Money to American Express. Gerald Levin, the former Time Warner CEO who engineered the deal with Case, now helps his wife run a holistic health center in Los Angeles. And in less than two weeks, the great and terrible combination of AOL and Time Warner, mighty destroyer of careers and shareholder wealth, and vivid reminder of the excesses of the Internet bubble, finally will be undone.

On Dec. 9, Time Warner will spin AOL back out to the public, issuing one share of its stock to Time Warner holders for every 11 shares of the parent company. The shares began trading on a "when-issued" basis on the New York Stock Exchange last Tuesday -- and the debut wasn't pretty. Trading started at 27, but the price dropped to 23 the day after Thanksgiving. At that price, the new AOL had a stock-market value under $2.4 billion. Having swallowed a whale, it has in the end been transformed into a minnow."

If you're calculating a cumulative return, Time Warner's purchase of AOL for $182B and subsequent spinout at $2.4B works out to a loss of 98.68% over almost 10 years.  Nice trade Time Warner!

Not to be outdone, the City of Detroit sold the Pontiac Silverdome last week for pennies on their cost basis dollar:

"Nearly 35 years after taxpayers spent $55.7 million building the Pontiac Silverdome and a year after a $20 million sale fell through, city officials have sold the arena once called the most desirable property in Oakland County.

The price: $583,000."

My handy HP-12C tells me that's a loss of 98.9%, although it took the Silverdome much longer to achieve a similar rate of return as AOL did for Time Warner.



EconomicDisconnect said...

Maybe debt is not "money" going forward, yes?

Yangabanga said...

Obviously the city of Detroit has never heard of reserve price auctions. Even if you can't run it profitably with the $1.5mm carry cost, the fixtures, steel and property value alone are worth more than that.

Then again you might be able to buy a city block in downtown Detroit for that much... with an FHA loan!