Want to see real currency swings? Check out the AOL-HuffPo deal.

February 8, 2011: 11:29 AM ET

AOL has never been shy about acquisitions. But how they pull them off sure has changed.

AOL guy

This time he's offering cash (Photo: Frank Gruber/Flickr)

AOL Inc. has the same initials and hunger for takeovers that the old America Online did—but it does them in a very different way. The new AOL uses a takeover currency that the old AOL almost never used: it's called cash.

The old AOL (AOL) did a ton of takeovers, too, but almost always used a different currency: its wildly-inflated stock.

The most telling example: the companies' biggest takeovers. AOL Inc.'s biggest takeover thus far, the $315 million pending deal to buy Huffington Post, consists of $300 million of cash and $15 million for giving AOL stock options to holders of HuffPo options.

By contrast, America Online's $150 billion deal in 2000 to buy Time Warner (Fortune's owner) was done entirely with America Online shares. To the lasting regret of Time Warner (TWX) shareholders at the time, many of whom include my current colleagues.

The Time Warner deal was typical for America Online, just bigger than its previous deals, such as its stock-for-stock takeover of Netscape, MapQuest, Moviefone and CompuServe.

When the Time Warner deal was announced in January of 2000, the peak to the Internet-telecom stock bubble, only a few skeptics like me (I was working at Newsweek), my current Fortune colleague Carol Loomis [See Loomis' 2000 story "AOL+TWX=???"], and Gretchen Morgenson of the New York Times wrote that AOL's currency seemed very inflated, and that Time Warner shareholders ought to be wary.

Unfortunately for Time Warner, it foolishly went ahead with the sale, which closed in January of 2011.

The original stated value of the deal was about $110 a share for the old Time Warner—1.5 shares of AOL, which had been selling at about $73 the day on Jan. 7, 2000, the last trading day before the deal was announced.

Current value of the consideration that Time Warner shareholders got: a whopping $28.71, according to data from Capital Changes, which is part of Wolters Kluwer Financial Services.

The fact that you need a service to help you figure this out shows what a disaster the deal was, and how much has happened since then to obscure the price Time Warner shareholders paid for getting inflated stock rather than cash money.

Since the original deal, there have been name changes (to AOL Time Warner, then back to Time Warner), control changes (the AOL guys got the boot in 2003), a reverse split of Time Warner stock, the freeing of Time Warner Cable (TWC) and AOL to become separate companies and meet their own destiny.

In case you're interested—or masochistical—the holder of an original Time Warner share in 2000 now owns half a share of the current Time Warner (current value: $18.06); 0.1255 of a share of Time Warner Cable ($8.72); and 1/11th of a share of AOL ($1.93). A far cry from the $110 of AOL Time Warner stock that the 2000 deal claimed to be offering.

It's sure interesting to see AOL using cash rather than stock for its takeovers. Is it because the company considers its stock underpriced, and doesn't want to dilute itself? Or is it because the entrepreneurs selling their businesses to today's AOL don't want to be Time Warnered? That's my bet. Stocks come but cash is never out of style.

--Reporter associate: Marilyn Adamo

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About This Author
Allan Sloan
Allan Sloan
Senior Editor at Large, Fortune

Allan Sloan, who has been writing about business for more than 40 years, joined Fortune in July of 2007. Before that, he was the Wall Street editor for Newsweek for 12 years. His work also appears in The Washington Post. Allan is a seven-time winner of the Loeb Award, business journalism's highest honor, receiving awards in four different categories for five different employers. He is a graduate of Brooklyn College and has a master's degree in journalism from Columbia University. He and his wife live in New Jersey. They have three grown children.

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