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Wednesday, May 21, 2008

Story of a Deception of over $1 Billion in Advertisements

While millions of bloggers and Internet entrepreneurs out there are busy getting clicks on their PPC ads, while many are earning scanty sums, while many are just about to begin with no idea of what SEO, SEM, etc., are, here are eight big shots, who, before the advent of all these advertisement schemes, before every boom in Internet today, showed an ad revenue of about $1 billion.

Year 2000: AOL, one of the largest Internet communications companies of the US, acquired a proportionately larger Warner Inc. You might find this interesting to note: AOL, which is far smaller a company than Time Warner Inc. bought out Time Warner, and the deal was closed with former AOL shareholders holding 55 per cent of the AOL Time Warner (name of the merged company) shares, while the former Time Warner shareholders held only 45 per cent. Like a sheep ate up the whole wolf!

Time Warner, which has an assets holding of nearly $58 billion now, had far less than that six years ago (only $15 bn). And AOL stood at $5 bn. But, AOL CFO (Chief Financial Officer), Michael Kelly told that the company generated more than $40 billion every year in ad revenues, and $1 bn in EBITA (Earnings Before Interest Tax Appreciation). So, it looked like naturally the AOL was the bigger company (or made to look), and could pull off the deal in its favor.

And the merger, the largest in the history, was to create a company worth around $300 billion, with reach over whole of the Americas, Europe, and Asia. With conjectures that it would touch everyone’s life at least once, the company would be the largest media conglomerate that ever existed. It was also adjudged that the conglomerate would soon acquire Yahoo! and would force Microsoft for cooperation with it (possibly another merger).

And Steve Case, that time CEO and chairman of AOL, would be the CEO of AOL Time Warner. Analysts from allover the world blabbered supporting the timeliness and intelligence of the companies to pull off such a deal without the slightest idea of what was to come. And the merger finally happened on February 11, 2000, with high hopes. It’s needless to say of the part that $1 billion played in the merger.

The forecast of the analysts was: AOL, which is largely an Internet based company would allow Time Warner expand their Internet reach to millions. And the Time Warner, with their Internet service provider subsidiary, Roadrunner, would strengthen the ISP business of AOL, which hitherto had no ISP facility. And soon enough, the merged company, the largest of the time, would gorge up other players in the industry like Yahoo!, Microsoft, and Google and would thenceforth be possibly the largest company in existence in history.

But soon after the merger, the ISP business of AOL dropped, and market share of many independent companies also fell for the merger, directly affecting also, AOL. Time Warner, whose subsidiaries worked mostly on their own resented having a new boss in AOL. Many Internet providers, who provided service to Time Warner, lost their client after the merger, since Time Warner and its subsidiaries were forced to use AOL for all their Internet needs. Thus, those other companies dipped in market share. But the huge load on AOL, soon failed its network, and Time Warner had to go back to the previous service providers, shattering the trust people had on it.

Soon, enough damage was done, and AOL faced serious set back in market. And together they reported a terrible annual loss of $98 billion in 2001, the year after the merger. Their loss was almost equal to the total revenue of IBM or HP.

Now, let’s come back to the task at hand. The one billion in EBITA. Eight of the AOL’s employees are now under the wrath of the Securities and Exchange Commission (SEC). This one billion in EBITA had been a major factor in the merger in 2000, when AOL had been under pressure to show high ad revenues to have a successful merger with Time Warner. And eight ‘loyal’ employees of AOL allegedly helped the company achieve the target by scribbling on paper an extra $1 billion. And that helped the easy pull off of the deal.

Four of these eight men, have already settled their charges by throwing in huge sums. The other four may soon clear their names too. F MacGuidwin, former controller of AOL, David M Colburn, former head of AOL business affairs unit, Eric L Keller, an AOL business affairs exec., and Jay B Rappaport, another business affairs executive, are those who cleared their names off the affair. John Michael Kelly (the person who announced the $1 bn), the former CFO of AOL, Joseph A Ripp, former CFO of AOL division, Steven E Rindner, former business affairs executive of AOL, and Mark Wovsaniker, former head of accounting policy, are the four yet to clear their names, as reported by The New York Times.

These are the figures they will pay for clearing their names:

Mr. MacGuidwin: $2.4 million

Mr. Colburn: $4 million

Mr. Rappaport: $750,000

Mr. Keller: $1 million

And Mr. MacGuidwin and Mr. Colburn were debarred from serving in any company director board for 10 and 7 years to come respectively.

About the other defendants, we have to await the charges and see if they would clear their names as well.

Copyright © Gayatri Jayashankar 2008