Forget Iran Nukes, This Is The Worst Deal Anyone Ever Made...

Authored by Simon Black via,

It’s considered the worst merger in history.

Back in January 2000, AOL bought Time Warner for $162 billion, which was considered an astonishing amount of money back then.

Their goal was to create a tech/media giant. And they failed miserably.

Time Warner was having a difficult time establishing an online presence, so they thought they would benefit from AOL’s 26 million dial-up subscribers.

And AOL, the leader in “online” at the time, was supposed to benefit from Time Warner’s cable network and content.

At the time – peak dotcom madness – tech firms could do no wrong, and investors praised the ambitious merger.

But January 2000 was literally THE top of the market. The dot-com bubble burst almost immediately afterwards. Recession followed.

In addition, AOL was bleeding subscribers as cheaper and faster broadband Internet providers stole market share.

By 2002, the merged companies were performing so poorly that they had to take a $99 billion write-off– the largest in corporate history– to account for the deterioration of AOL’s business.

They say history doesn’t repeat, but it often rhymes. And today the tech world and media world are once again in a frenzy to merge.

Earlier this month, telecom giant AT&T completed its acquisition of media titan Time Warner following a 2-year ordeal to obtain government approval.

Now, the fact that these two private companies had to fight in court against the government simply to be able to merge is pretty ridiculous.

But this letter isn’t about the heavy hand of government.

It’s about debt.

Because, including the whopping amount of debt that AT&T inherited, the deal between the two companies was valued at $108 billion.

$108 billion. That’s an awful lot of money that AT&T paid for Time Warner.

Yet in exchange for such a princely sum, Time Warner will only contribute around $1 billion in annual Free Cash Flow to AT&T.

This is crucial to understand.

Remember that, in simple terms, Free Cash Flow represents the final profit available to shareholders after all capital investments, taxes, and other expenses have been deducted.

Plus, because Free Cash Flow filters out most accounting gimmicks, it’s one of the better representations of a company’s true profitability.

So that means AT&T bought Time Warner for about 100x Free Cash Flow, equivalent to a yield of just 1%.

AT&T believes, however, that certain ‘synergies’ exist between the two companies, which could increase that Free Cash Flow level to $3 – $3.5 billion.

Yet even if they’re successful in achieving that target, AT&T’s effective return will only rise to 3%.

That’s the best case scenario… which is hardly worth writing home about.

I mean, seriously, you could do better than that buying government bonds. Why take on so much risk for such a trivial return?

But in order to achieve this 3% target return, AT&T had to (a) dilute its existing shareholders, and (b) take on tens of billions of dollars in debt.

According to AT&T’s own press release, the company now has $180.4 billion of net debt.

And we needn’t go back too far in the past to highlight how ridiculous this is.

In 2010, AT&T generated $15.4 billion in Free Cash Flow. And at the time it had $57.5 billion in net debt.

By the end of 2017, the company’s free cash flow had increased 20% to $18.5 billion.

Yet its debt more than DOUBLED to $125 billion.

Think about that– a 20% increase in Free Cash Flow, yet a 100% increase in debt.

And now, post-merger, the company is increasing debt another 44% to $180 billion, while Free Cash Flow is increasing about 5%.

This is a massive imbalance. The role of any company’s management is to allocate resources in a way that safely maximizes returns for shareholders.

Yet AT&T seems to be doing the opposite– taking on riskier levels of debt to generate diminishing returns.

They’re not alone.

Already, global corporate debt excluding financial institutions stands at a record $11 trillion. And just like AT&T, debt has grown much faster than Free Cash Flow.

There’s also currently a bidding war between Disney and Comcast for just a portion of 21st Century Fox’s assets.

The bid is now $71.3 billion, though it’s possible the final amount could be MUCH higher… and another ridiculous multiple of Fox’s Free Cash Flow.

According to the Wall Street Journal, the combined AT&T/Time Warner and Comcast/Fox entities would carry a combined $350+ billion of debt.

That’s larger than the size of the Colombian economy.

It’s pretty remarkable to even be able to borrow that amount of money, let alone for assets which produce relatively small returns.

This is one of the telltale signs of being near the top of a bubble - when companies throw caution to the wind and take on substantial risk for minimal benefit.

It’s worth thinking back to the housing crisis and financial meltdown a decade ago.

Prior to the collapse, banks spent years loaning money at practically 0% to borrowers with bad credit.

And more than that, these risky borrowers didn’t even have to put down any money. Banks commonly loaned up to 105% of a property’s purchase price… and used their depositors’ savings to do it.

Bear in mind, banks often made less than 1% on these mortages.

So just like the AT&T example today, banks from a decade ago took on huge levels of risk in exchange for miniscule returns…

… until eventually the entire system blew up.

That’s not to say there’s some imminent financial catastrophe looming.

But it would be silly to ignore the impact of adding hundreds of billions of dollars worth of debt to acquire assets which contribute comparatively tiny returns.

And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.


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In reply to by wadalt

Bastiat Janet smeller Mon, 06/25/2018 - 18:42 Permalink

"Remember that, in simple terms, Free Cash Flow represents the final profit available to shareholders after all capital investments, taxes, and other expenses have been deducted. "

Back in the day . . . early late 80s, early 90s, free cash flow was the cash flow available to service debt.  The state of the art Stern/Stewart merger model, allowed you to project two companies, merge them and then pry out the non-cash items to get to that number.  The number was important because it established an upper bound estimate on leverage to finance the merger.

I know this because I was in M&A then, went to Stern Stewart school and as a subscriber, ran the model for a year.  Part of the deal was free support.  They all knew me by my voice after a few weeks.  I was like a 300lb-er at a buffet.

In reply to by Janet smeller

cro_maat Reichstag Fire Dept. Mon, 06/25/2018 - 20:37 Permalink

That is so last millennium. Now they can create a User Token and do and airdrop. Time Warner's content will allow them to create a lot of user (blockchain) value which will blow up the airdrop tokens. The merged ATT & Time Warner will have their stash of user tokens at a few 100 Billion and voila management pays off the debt and takes the whole company private.

In reply to by Reichstag Fire Dept.

monkeyshine cro_maat Tue, 06/26/2018 - 16:30 Permalink

It only took about 35 years from the breakup of AT&T "Ma Bell" monopoly until they bought it back, basically. Now of course their copper lines are mostly useless though they do still provide DSL lines to some areas. But they have a huge percentage of cellular telecom, they are the largest provider of fiber optic, and have about 70% market share for coaxial cable internet with their Time Warner/Spectrum/Charter acquisition(s).  That last bit is the most important.  They probably won't get Fox, I think the Murdoch clan want seats on the Disney board, but you never know.

In reply to by cro_maat

I Am Jack's Ma… The central planners Mon, 06/25/2018 - 18:57 Permalink

Just keep repeating “Iran nukes” and no one will notice the total lack of evidence and statements by CIA, Mossad, and IAEA officials that Iran has no nukes, nor diverted any uranium.

Nor will they notice that Netanyahu has been repeating the line that Iran was months away for DECADES, as he built more of his own and stole from the United States to do it.


The Israelis are the Heavyweight champs of lies and accusing others of what they do.

No one but Zionists think it was a bad deal.  

When the world thinks a thing is good and Israel/Jews don’t, one is well-advised to examine Israel’s claims closely.


The truth is no deal would satisfy them because they want Iran smashed by Uncle Goyim... which is why the goal posts keep getting moved. Iran isn’t supposed to have ballistic missiles that might mean Israelis feel some pain when Israel attacks-claiming-defense (as they did in ‘67 and over and over in Lebanon and Gaza and Syria)....  

Iran is not merely an important factor keeping Lebanon free of Jewish occupation, with no sanctions it would be an **economic** rival to Israel...


except as to organ and sex trafficking of course, the world headquarters of which, to no one’s surprise, is the Jewish State.


Funny how xenophobic, racist quotes from Torah and Talmud are ‘anti-Semitic,’ eh?


In reply to by The central planners

rejected BankSurfyMan Mon, 06/25/2018 - 22:23 Permalink

"Support women rights in IRAN!"

I supported women's rights here in the states. Now those women saying, as a White man, I am the most vile creature on the planet and have caused everything wrong in the world since the beginning of time. They call me a misogynist, a racist, chauvinist, pig, homophobe, and a host of other interesting names and want me to wear funny looking Vagina hats.

No thank you,,, I'll pass.

In reply to by BankSurfyMan

ElTerco Mon, 06/25/2018 - 18:02 Permalink

"So that means AT&T bought Time Warner for about 100x Free Cash Flow, equivalent to a yield of just 1%."

And why is Randall L. Stephenson CEO of *anything* with this kind of investing prowess? He could have doubled this yield by buying 4-week T-bills. His decision to issue $40 billion in new debt to finance this deal was a multiplier on the stupidity. And this, after throwing money down the drain on the other turd, DirecTV?


izzee Mon, 06/25/2018 - 18:07 Permalink

Funny, I got my Att Cell phone bill ... and guess what it went up!!!!  Not much, but it was all in FEES That Are Allowed at the Discression of ATT.  Cannot Be Disputed.

$0.70...Times WTFKnows number of accts.   Covers an interest payment

any_mouse izzee Mon, 06/25/2018 - 20:51 Permalink

Check out the E911 fee.

The exact verbiage in the government edict says "the fee is to be paid by the carriers".

Does not say "paid by the subscribers" or "collected by the carriers".

Don't you think the E911 infrastructure should be paid for by now?

Talk about microaggressions. Those fees add up with 295 million subscribers between the two giants, VZ and T, for Q1 2018.

Not worth any one individuals time. A class action?

In reply to by izzee

indygo55 Mon, 06/25/2018 - 18:14 Permalink

What were the fees and commissions? That's what drove the people in the last crisis. Don't ya think the fees and commissions are a driving force to make these deals today? They couldn't give a shit about the actual performance of the deal except what the people who are driving these deals make today, not tomorrow.

Vardaman Mon, 06/25/2018 - 18:16 Permalink

My favorite thing is that very soon now AT&T and Verizon will make purchase of their "media content product" mandatory to purchase cell phone service.  At which point I buy a fucking Trac-Fone.

Utopia Planitia Vardaman Mon, 06/25/2018 - 20:12 Permalink

They will have to do that.  There is no other way a deal like that can survive.

If they were smart they would just flush TimeWarner down the toilet tomorrow and close the entire opperation!  That might get lots of new customers to move to ATT cell phone service!  :-)

More likely, they will lobby demoncraps to pass some new tax or fee to pay for their stupidity.

In reply to by Vardaman

jm Mon, 06/25/2018 - 18:31 Permalink

Speaking of Iran, the biggest anti-theocracy protests since 2012 going on.


for a site dedicated to apocalypse porn, how did you miss this... maybe too biased?

Consuelo Mon, 06/25/2018 - 19:22 Permalink

"That’s not to say there’s some imminent financial catastrophe looming."


In other words - 'Holy shit Batman, this f'ing house 'O cards is about to collapse...!' 

Not today or next year though, don't worry - everything is fine, carry on...

IDESofMARCH Mon, 06/25/2018 - 20:37 Permalink

AT&T and Time Warner is noting but CEOs, bankers, insiders and deal makers grabbing massive cash grabs and getting out before  AT&T IMPLODES just like Enron. The Stock Markets are OUT OF CONTROL, over hyped, extremely overvalued and at the cliffs edge. There's no ups from here just DEAD CAT BOUNCES for the BTFD fools and high stake high loss gamblers. 

Thraxite Mon, 06/25/2018 - 21:40 Permalink

Seems to me all these corporations are in the business of debt expansion. They may use different methods and mediums to get there, but they are definitely not used for wealth creation. Debt and the interest on it only helps one niche group of people and that is the bank owners. How can these "businesses" and "giants of the financial world" be considered successful when they are simply existing due to being given access to credit. A system like this can't last, nor is meant to.

jack stephan Mon, 06/25/2018 - 23:08 Permalink

Muslims, ha, bunch of primitives.

If I'm going to place my money on a system that can excel beyond anything In human history I pick them stubborn christians. Makes me sick and it does.

Muslims=same historical time frame very low ROI, high collateral damage genocidal almost.

Christians= same historical time frame exponential roi, creepy collateral damage. Industrial revolution and middle class explode in effort and return.

There's my answer. The lord is fucked up,  and he sickens me,but not as fucked up as allah.  Allah is a gaylord, 24 hours a day, and will blow you up for a shiny blanket

Boom, fixed it for all of you, my noodles are cooking, so do whatever it is you do best homos.....SLAYER!!!!!!!!!