Since it’s unusually cold in my neck of the woods, and since I hate being cold, I’ve been staying inside with the heat up around 82 degrees and a copy of every public filing AOL made in the last three months in front of me. The more I read them, the more uncertain I become. I think what’s got me feeling most uncertain is Tim Armstrong’s math. Take the layoffs. Please. They save the company not $300 million in the first year, as advertised…try maybe $64 million. Here’s how…
Layoffs are projected to save $300 million yearly but will cost as much as $200 million to administer, which includes the cost of paying each laid off person’s severance and COBRA, closing some as-yet unknown “facilities”, and so on. If the $200 million only cost $200 million, then AOL would come out ahead by $100 million on the layoffs, but…AOL’s net income is so low (just scraping $74 million) that it seems like Timmy had to run to the bank for some money. So he set up a $250 million revolving line of credit with fluctuating interest rates, just like on your credit card.
I have no idea how much of the $250 million AOL will ultimately borrow, what fluctuating interest will be, nor how long AOL will take to repay whatever it owes, so I’ve assumed AOL will use up to $200 million to restructure and will use the other $50 million for day-to-day operations. I ran the loan through a Yahoo finance calculator at flat 8% interest for 10 years. Assuming those figures are accurate (which I’m not assuming, believe me) the outcome is:
Total interest will work out to around $134 million – almost half the loan amount, and about 70% of what it will cost to lay off employees.
Monthly payments (assuming they are monthly) would be a little over $3 million.
Average monthly interest will work out to about $950 thousand.
The total amount to be repaid, including interest, will be just shy of $383 million. Time Warner also gets 1% interest on the total amount of the loan for as long as it’s being serviced. That brings us up to $384 million, easily, for AOL to spend $200 million to save $300 million dollars a year by laying off 2,500 people. Capice?
Is it worth it? And to whom?
The math from here, assuming my numbers are anywhere near accurate, suggests AOL might save just $64 million this year.
Of course, it will look better on paper. Loan repayments each year, according to my figures, work out to “only” $36 million, as opposed to continuing to pay $300 million a year for 2,500 employees, so when you look at quarterly numbers, you won’t see the $134 million loss that interest paid by AOL might incur over the service life of the loan; you’ll just see big “savings” on employee costs each quarter, as opposed to the much smaller amounts put toward loan repayments.
Looking beyond AOL’s first year (and it will be rough, between restructuring costs, loan repayments, various debt repayments arising out of fraud and cancellation charges, continuing subscriber losses, and an under-performing stock, which was targeted by a few analysts to trade at $31 out of the gate, but hasn’t approached anything near that wuthering height yet), if, for any reason, AOL defaults on this loan, Bank of America will become the new owner of every patent and trademark currently owned by AOL. It will also own all patents and trademarks that AOL might create up until default takes place.
What would AOL’s new slogan become in that case – “Welcome, you’ve got banking”?
Can any of you imagine AOL effectively being owned by Bank of America? It’s not as clear-cut as that: the terms of the loan prevent real property from being seized should AOL default, but if AOL loses all patents and trademarks, they basically lose the right to run their own business – instead, they get to “manage it” for BOA. At least that’s how I see it. I’ve looked online for a better explanation of what happens to a business should their patents and trademarks come to be owned by a bank, but I can’t find any good real life examples.
What buy you?
BusinessWeek offers financial comparisons between AOL and a few companies, including Earthlink. Earthlink, though it has no future as a dial-up provider, is a pretty decent broadband provider with financials that look much better this year than AOL’s, and it’s not banking on an unproven Demand Media business model with nothing but a fading subscriber base and a struggling advertising unit to back it, so it might be a safer bet than buying stock in AOL.
Full disclosure: I don’t buy, sell or trade stock – I never have – so it would be an overstatement to call me even an armchair analyst. If I did buy and sell, I would still encourage you not to quote me, since I’m more intuitive than I’m able to make a mathematically-based call.
My prediction? AOL’s stock will rally before spring, rise and fall some, peak mid-summer, then slowly slide back again, with everyone talking disaster by December of this year. It will ultimately (long-term) not do too well. I don’t know why I think any of that, and again, I could be completely wrong, so take me with a big, fat grain of salt.
Do I want AOL to fail? Do I plan on encouraging it?
No, and no. I simply want AOL to get out of the dial-up business. I know subscribers are their only major source of income, so I feel bad that I really want those people yanked right out from under them, but AOL’s dealings with consumers, to this day, have been less than on the up and up, especially when it comes time to cancel payment of their dial-up plans. Between that and AOL’s difficult-to-remove software, their old business model – locking in consumers – bothers me on too many levels.
So I want AOL to get out of any business that involves selling anything to anyone. That means they need to either sell or close access and try to make money online off of advertisements that run alongside their new content. Once they do that, I don’t care if they succeed or not, but I’m not against them succeeding, should a day like that come.