On December 2005, Google Inc. (GOOG) and AOL — a wholly owned subsidiary of Time Warner Inc. (TWX), announced an expansion of their existing strategic alliance by creating a global online advertising partnership with the inclusion, at the time, of $1 billion investment by Google in AOL – for a 5% indirect equity stake.
Two years ago, the Internet giant gave AOL a theoretical valuation of approx. $20 billion. However, Google’s 5% stake in Time Warner Inc. unit, according to a 10-Q filing made on Thursday, may be worth less. In fact substantially less.
According to analysts projections – AOL’s $20 billion valuation has been revised down in half to as low as $10 billion. (Honestly, there is no logical way AOL’s dial-up business is worth even $10 billion. In the last couple of years, AOL has lost already nearly half of its total subscriber base. 8.3 million cancellations against 9.3 million paying members). In its SEC filing Google didn’t estimate what it believes its stake to be currently worth. At current market valuations however, Google stands to lose an estimated $500 million if AOL is spun off.
From Form 10-Q:
Investment in America Online (“AOL”) – We review our investment in AOL (NYSE: TWX) for impairment in accordance with FSP SFAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”). Based on our review, we believe our investment in AOL may be impaired. After consideration of the duration of the impairment, as well as the reasons for any decline in value and the potential recovery period, we do not believe that such impairment is “other-than-temporary” at June 30, 2008 as defined under FSP 115-1. As a result, our investment in this non-marketable equity security is carried at cost on our Consolidated Balance Sheets. We will continue to review this investment for impairment in the future. There can be no assurance that impairment charges will not be required in the future, and any such amounts may be material to our Consolidated Statements of Income.
Whether Google, known for its well-calculated business moves, naively overestimated AOL’s worth, it’s dubious at best. But considering the fact that in 2005 AOL was making some noise about partnering with Microsoft (MSFT), as Rafat Ali of paidContent rightly points out – “It was a defensive move—preventing Microsoft from powering AOL search—so it paid a premium”.