Let's make a deal! Just don't let the journalists figure out how much it's worth.
Readers this week might have been confused by the vastly different values placed on America Online Inc.'s planned purchase of Time Warner Inc.
The Washington Post figured the deal at $183 billion, the New York Times said it was $165 billion, and the Wall Street Journal, with remarkable precision, provided an estimate of $156.14 billion.
Some radio and television reports even pegged it at around $350 billion. That figure was in a company news release, but it appears to reflect the combined market value of the two companies, not the cost to AOL of buying Time Warner.
None of the newspaper estimates is really wrong. They're just figured differently. As national business editor for The Post, I oversee The Post's estimate of the values of major deals. Here are the guidelines The Post uses:
* When a company agrees to buy another one with its stock, we use the price of the stock before the deal is announced. In theory, that was the stock price the executives used when they negotiated the deal.
* If the acquiring company assumes a significant amount of debt, we include that in the total purchase price because the interest payments on that debt will eat into the revenue of the acquiring company.
* We use round figures because, after all, this is funny money, subject to swings in the stock market and different financial assumptions.
Once we set a figure, we stick with it until the deal closes. Obviously, the price actually changes with every downtick and uptick in the stock market. But that's confusing to readers (not to mention reporters and editors).
Depending on how you figure it, the value of the AOL-Time Warner merger has dropped about $30 billion since Monday--but if AOL's stock soars, it could be worth $30 billion more by the time the actual acquisition takes place. So we don't bother recalculating until the final transaction.
For those who care about such matters, here's how the math works, and why each paper reached a different result:
AOL is buying Time Warner with its own stock, so the value of the deal depends on three things: (A) the ratio of AOL shares to each Time Warner share; (B) the price of AOL stock; and (C) the number of outstanding Time Warner shares. A times B times C equals the value for the stock portion of the deal.
Each Time Warner shareholder will receive 1.5 AOL shares. In their calculations, The Washington Post and the New York Times used the price of AOL stock before the deal was announced. The Wall Street Journal used the price of AOL stock after the deal was announced. (The price fell from Friday to Monday, resulting in a lower total value.) The Post and the Times used Time Warner's estimate of the number of its shares outstanding--1.5 billion--while the Journal used a slightly smaller number--1.461 billion.
The Post then added in the value of Time Warner's hefty debt. The other papers did not.