AOL-Time Warner: An Issue of Ethics

Essay by sesslerA-, January 2005

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Was America On Line (AOL) and Time Warner a match made in heaven, or not? Many think not. And, if AOL had been forthright about its subsidiary, AOL Europe, perhaps the terms of the merger would have never happened, or been altered. It is too late to speculate now. Although AOL made a poor decision in the months prior to the merger; they have paid a price for that decision. However, with Time Warner in the picture, they may have found a way to ease the pain at this point. The history of the merger between AOL and Time Warner will show you what prompted the Securities and Exchange Commission (SEC) and Justice Department probes, which prompted AOL - Time Warner's strategy to alleviate stockholder concerns.

In October, 2000, with the AOL -Time Warner deal due to close in just three months, the European Commission (EC) ruled that its pending acquisition of Time Warner Inc could damage competition in Europe's media markets.

The EC was concerned that AOL was a 50-50 partner with German media giant Bertelsmann in one of Europe's biggest Internet service providers, AOL Europe, so the EC was ordering Bertelsmann to relinquish its control of AOL Europe. (Dwyer, et. al., 2004)

AOL was unwilling to own more than 50% of the venture since that could trigger a U.S. accounting rule that would force AOL to merge all of the unit's losses on its books at a time when AOL was already facing weakening ad revenues and a declining stock price. Therefore, Goldman Sachs Group Inc. agreed to purchase one percent, ½% from Bertelsmann and ½% from AOL, of AOL Europe for $215 million with the promise from AOL Europe that it could sell its portion back by a certain date at a set price. This solution seemed...