AOL to Take a $54-Billion Write-Down

AOL Time Warner Inc. will take a record $54-billion write-down in the first quarter to reflect a steep decline in the value of assets acquired last year when the leading Internet service provider bought the world’s largest entertainment company.

The company, whose stock has declined nearly 50% in the last year, warned Wall Street in January that it would take a noncash charge against earnings of $40 billion to $60 billion because of new accounting rules governing merger deals.

AOL Time Warner’s write-off, disclosed in a filing Monday with the Securities and Exchange Commission, is the largest in corporate history, surpassing telecom equipment firm JDS Uniphase Corp.’s record $50.1-billion charge in fiscal 2001.

Analysts weren’t surprised that AOL Time Warner’s charge was at the high end of the range the company had given, in light of the firm’s lower-than-expected earnings over the last year. Earnings suffered amid an advertising slump and a slowdown at the America Online Internet service.

AOL shares closed Monday at $24.21, down 29 cents, on the New York Stock Exchange. The stock is down 25% since Jan. 1.

The write-off is a reflection of the reversal in sentiment toward the Internet sector and the dramatic downturn in its value over the last two years. When America Online announced the merger with Time Warner in January 2000, the companies were worth $290 billion combined, compared with $126 billion when the acquisition was completed a year later and $111 billion today.

New U.S. accounting rules require companies to quickly account for the “impairment” of assets acquired in mergers.

In a takeover, the price a company pays above the market value of the target’s assets is carried as “goodwill” on the balance sheet. Under the new rules, that goodwill must be adjusted if the company believes the asset values are worth substantially less.

The adjustment is taken in the form of a one-time write-off that amounts to a balance-sheet change, but doesn’t affect the company’s basic operations.

A number of technology companies have recorded or are expected to record large goodwill write-offs as a result of the change in accounting rules.

In the filing Monday, AOL Time Warner also said discussions with its cable partner, Advance/Newhouse, could lead to a restructuring of the joint venture at the end of the month. Advance/Newhouse contributed about 7 million of the joint venture’s 12.8 million cable subscribers.

Advance/Newhouse has the ability to pull its assets out of the partnership at the end of the month, which would reduce AOL from the nation’s second-largest cable operator to the sixth-ranked.

The possible cable restructuring is just the latest in a series of setbacks since the AOL Time Warner merger was initiated in January 2000. Among the biggest challenges is the poor performance of America Online, which was pitched to investors as the growth engine of the new company.

But the Internet service provider is instead the poorest performer in the company, with growth in operating income expected to drop to 10% this year, down from 76% in 2000, according to a Merrill Lynch research report.

Lehman Bros., which expects growth to slow even more, reports the AOL division is being hurt by a combination of factors, including management turnover, a slump in advertising and the difficulty of keeping customers paying full rates for its service. Many investors say AOL is heavily discounting its service or giving it away for free to keep subscribers from terminating.

AOL Time Warner is expected to earn 15 cents a share, excluding certain expenses, in the first quarter, according to the average estimate of analysts surveyed by Thomson Financial/First Call. In the year-earlier period, the company earned 23 cents a share before expenses such as amortization.

According to the company’s filing Monday, AOL repurchased about 20.4 million shares of its common stock for about $733 million during the fourth quarter of 2001.

The purchases fall under a buyback program authorized in January that calls for the company to repurchase common shares from time to time for up to $5 billion over a two-year period.

As of Dec. 31, 2001, AOL Time Warner had repurchased 75.8 million shares for $3.03 billion.

In an effort to maintain financial flexibility and investment capacity, the pace of share repurchases under this program may decrease in 2002, the filing said.

The company paid an average of $39.99 a share for the stock.

As of Feb. 28, the company had about 4.3 billion common shares outstanding.