Principles of Micro and Macro Economics - Essay Example

? Micro and Macro Economics April 4, Question When the two leaders of the combining companies met in China, the two leaders excitedly decided to pursue the merger. The proposed merger between Time Warner and America Online had been planned to formally take effect on January 2000. The public’s demand for the two company’s products and services generated projected gains. Before the merger, several financial analysts opined that the proposed merger would be very successful (Baumol, 2011). Many quarters predicted the business after the merger will be rosy. A rosy business environment means that merger forecasts indicated that the combined company will be able to create a profitable synergy. The synergy included combining the marketing and management strategies of both companies. Since the two companies were economically profitable prior to the January 2001 merger, all business predictors expected that the combined company will be able to generate additional revenues that will surpass the combined revenues and profits of each of the two merger companies combined (Lipsey, 2007). In fact, the merger was a huge projected gamble at $348 million investment money on the line. Both America Online’s founder, Stephen Case, and Time Warner’s chief executive, Gerald Levin, had very high hopes that the merger will bring more revenues and profits to the new giant company, the merged entity cropping up from the two companies. The merger was expected to generate an equal share in the shareholders’ dividends. The board of directors of each of the two combining companies was expected to vote equally on all business decisions of the combined company (Hoskisson, 2005). Question 2 Both companies had similar motives for ensuring the success of the merger. Time Warner entered the merger in order to enhance its benefits from both the supply equation and demand equation (Microeconomics). Similarly, America Online entered the merger in order to enhance its present benefits from both the supply equation and demand equation (Hirschey, 2005). Additionally, Time Warner joined the merger to enhance the company’s macroeconomic environment. The company’s macroeconomic goals included improving its total economic activity, especially in the area of growth. The company’s other macroeconomic goals included the successful resolution of the obstacles of inflation. Further, the company’s macroeconomic goals included contributing to the reduction of the nation’s unemployment rate (Hall, 1997). Similarly, America Online vigorously entered the merger in order to enhance the company’s macroeconomic environment on January 10, 2000. The company’s macroeconomic goals included improving its total economic activity, especially in the area of growth (Tucker, 1997). The company’s other macroeconomic goals included the successful resolution of the obstacles of inflation (Khoury, 2003). Further, the macroeconomic goals of Time Warner and America Online are geared towards contributing to the improvement of the nation’s economy. The nation’s economic indicators include gross domestic production. The nation’s economic indicators include international trade. The merged company’s global market included clients from outside the United States. The merger between Time Warner and America Online occurred on January 2000. The merger was considered as one of the largest merger s in United States history. The merger involved an estimated $348 million. America Online’s founder, Stephen Case, was proud with the merger. Likewise, Time Warner’s chief executive, Gerald Levin, felt that America Online’s formidable internet presence would catapult America online to greater financial profit heights (Hoskisson, 2005). After the merger was consummated, the new merger focused on reducing the number of redundant employees. With the retrenchment, the number of unemployed United States citizens ballooned to unfavorable macroeconomic levels. Today the combined value of the two companies, Time Warner and America Online, dropped to less than what the individual companies owned during the January 2001 merger. In the current United States economic landscape, the merger between America Online and Timer Warner was a complete economic failure (Hoskisson, 2005). At the time of the January 2000 merger, the stock market price of America Online was definitely better than the stock market price of Time Warner. The merger condition stated that America Online would own the bigger 55 percent of the combined company. On the other hand, Time Warner would own the lesser 45 percent of the combined company. Consequently, Mr. Gerald Levin of Time Warner took the helms of the merged company as Chief Executive. Mr. Steven Case of America Online led the company as Chairman (Hoskisson, 2005). During the January 2000 merger, America Online offered and estimated $166 billion in stock and assumed an estimated $16.9 billion of total liabilities. The new media online giant, America Online, was able to acquire an old Fortune 500 media company, Time Warner. At the time of the merger, America Online was worth $350 billion market value (Hoskisson, 2005). Question 3 Time Warner had an intrinsic value before pursuing the completed merger with America online (AOL).There are several ways to compute for Time Warner’s intrinsic value before pursing the completed merger with America Online. One of the most popular intrinsic value computation method is the use of financial statement analysis. The 1999 Financial statement analysis includes determining the company’s net profit ratio (Kronemyer, 1999). One of the financial statement ratios is current ratio (Khan, 2009). The ratio shows the amount of current assets that are available to pay for the company’s currently maturing obligations. The current ratio includes several balance accounts. The 1999 asset balance sheet accounts include cash, prepaid expenses and other accounts. The inventories account title includes items that were not sold within the 1999 annual accounting period. The receivables account includes the amounts that are collectible from the company’s 1999 credit sale customers. The prepaid expenses include the amounts that had been paid during 1999 but were not yet incurred or used by the company. The current liabilities include the amounts that are payable within one year from the end of the balance sheet date. The current liabilities account normally includes the accounts payable account. The same current liabilities account may includes the notes payable accounts that are payable within one year from the end of the 1999 balance sheet date.                 Current Ratio computation:     millions     Current asset = 9,861.00 = 1.02     current liabilities 9,670.00                 The above computation shows that the company’s 1999 current ratio is 1.02. The ratio shows a favorable intrinsic value of the company for the year 1999 (Khan, 2009). Additionally, the debt to equity financial statement ration shows the amount of liabilities and ownership investments were used to contribute to the company’s cash inflows. The liabilities include the short term obligations and the long term loans. The long term loans are paying within a time period that exceeds one year from the end of the 1999 balance sheet date. The 1999 long term loans include the company’s $18,083 million long term debt. Likewise, the company is liable for $ 4,234 million tax liabilities (Khan, 2009). The company’s stockholders’ equity account includes the amounts owned by the preferred stockholdings of the company. Additionally, the stockholders’ equity account includes the common stockholders’ investments. Lastly, the stockholders’ equity account includes the required paid in capital amount (Khan, 2009).                 Debt /equity ratio computation:         Total Debt = 41,526.00 = 4.28     Total equity 9,713.00                 The above computation shows that the company’s 1999 debt to equity ratio is 4.08. The ratio shows an unfavorable intrinsic value of the company for the year 1999. The best debt to equity ratio is 1.0. Further, the inventory turnover financial statement analysis tool shows how many times the inventory was turned into revenues. The company having a higher inventory turnover ratio shows a better image of the company than another company having a lower inventory turnover ratio (Khan, 2009).                 Inventory turnover computation:         Cost of Sales = 14,940.00 = 6.73     Ave. Inventory 2,220.00                 The above computation shows that the company’s 1999 inventory turnover ratio is 6.73. The ratio shows a favorable intrinsic value of the company for the year 1999. Furthermore, the net profit margin financial statement ration shows the relationship between the company’s net profit and the net sales during the same accounting period. The net profit is arrived at by deducting the operating and administration expenses from the gross profit figure. The gross profit figure is arrived at by deducting the 1999 cost of sales figure amounting to $14,940 million from the 1999 net sales figure amounting to $27,333 million (Khan, 2009).                 Net profit Margin computation:         Net Profit = 1948 = 0.07     Net Sales 27333                 The above computation shows that the company’s 1999 gross margin ration 0.07. The ratio shows a favorable intrinsic value of the company for the year 1999 (Khan, 2009). Moreover, the return on equity financial statement ratio shows how much net income was generated by the stock investments. The ratio shows the effect of the 1999 net income on the stockholders’ investments (Khan, 2009).                 Return on equity computation:         Net Income = 1948 = 0.20     Stockholders' Equity 9713                 The above computation shows that the company’s 1999 return on equity is 1.02. The ratio shows a favorable intrinsic value of the company for the year 1999 (Khan, 2009). There are many advantages of using the financial statement analysis valuation method. The current ratio financial statement ratio indicates whether the company will be able to pay all its current obligations on time. A positive ratio indicates the company will favorably be able to its obligations on time, a favorable intrinsic value. A negative ration indicates the company cannot pay its currently maturing obligations on time, an unfavorable image or intrinsic value of the company (Khan, 2009). The debt to equity financial statement analysis ratio shows whether the company was able to comply with the basic accounting concept stating that the best leverage (debt to equity) ratio is 1.0 ratio, the best intrinsic value image. If the ratio is greater or lesser than the 1.0 ratio, the ratio shows a vivid image that the company was not able to level the playing field, an unfavorable intrinsic value. Leveling the playing field includes generating equal cash inflows from both borrowings and the stockholders’ investments (Khan, 2009). The inventory turnover ratio shows how fast the company was able to turnover inventories in order to generate the 1999 accounting period’s revenues. Higher turnover ratios indicate a better image or intrinsic value of the company (Khan, 2009). The net profit margin and return on equity ratio shows the net profit effects of each accounting period’s generated revenue. A higher net profit margin or return on equity ratio indicates better image or intrinsic value of the company. On the other hand, a lower net profit margin or return on equity ratio indicates an unfavorable image or intrinsic value of the company (Khan, 2009). Question 4 The merger between America Online and Time Warner was not beneficial to the shareholders (Khan, 2009). After the merger, the business operation of the merged company was not beneficial to the shareholders. The decline in the merged company’s advertising revenues dropped to unprecedented levels. After the merger, the difficult economic time precipitated the unfavorable decline in the retirement funds of both America Online and Timer Warner were reduced to unfavorable levels. Additionally, the poor economic performance of the combined companies forced many management overhauls. The overhauls were implemented to stave off the dismal economic decline of the merged companies. Further, one possible reason for the economic collapse is that the merger had prevented the two separate companies from continuing what they were initially popular for (Khan, 2009). With the merger, each of the new companies had to change their current economic activities. With the change, the public’s image of the new merged company was not well accepted. The America Online’s new media economic environment was being unfavorably dragged behind by the Time Warner’s old media economic activities. In today’s economic value, the combined companies’ economic value was estimated at 14 percent of the combined companies value during January 2000 (Hirschey, 2005). In 2002, the merged company presented to the public a dismal economic performance. The economic scene indicated that there was a continuing trend of declining demand for the merged company’s advertising products (Albelda, 1999). With the declining advertising revenues, the company retrenched many of the company’s employees. America Online’s 20 percent share in the online advertising business demand had steeply dropped to an unprecedented six percent share in the same online advertising demands. One of the factors for dismal economic failure of the merger was the expiration of 50 percent of the advertising contracts signed during the popular dot.com era. Consequently, the merger generated an estimated 39 percent drop in the combined company’s 2002 revenues. Future economic projections indicated that the reduction will continue unless effective economic rescue measures were injected into the merged company’s economic equation (Khan, 2009). With the decline in advertising revenues, the stockholders received reduced dividends (Khan, 2009). The dividends are computed by dividing the annual accounting period’s net income by the number of outstanding shares of stocks. The shares of stocks include both the preferred stocks and the common stocks. With reduced dividends, the shareholders received lower cash amounts from the beleaguered merger. Consequently, the shareholders may be persuaded to withdraw their investments in the merged companies. When this happens, the stock market price of the merged company unfavorably drops. The economic principle of demand states that as the demand for the product declines, the price of the product correspondingly declines (Nordhaus, 1995). If the merger between Time Warner and America Online did not push through in January 2001, the shareholders would not suffer from the rippling effects of the merger. American Online will continue to generate more online advertising revenues. Likewise, Time Warner will continue to generate higher revenues. The merger was a bottleneck that prevented the two separate companies from continuing their original profitable business venture (Khan, 2009). Question 5 With all indicators showing that the company is on the brink of bankruptcy, the best alternative is to favor the demerger between Time Warner and America Online (Khan, 2009). With the demerger, both companies can part ways. Parting ways will stop the current low demand for the merged company’s products and services. (Rush, 1998) Time Warner can continue with its prior marketing and management plans. With the prior marketing plans in place, Time Warner can regain lost ground by going back to its old media marketing strategy. Time Warner will appeal its prior clients that the company had taking a 180 degree business operations turnaround. Time Warner can hope that the prior clients will generate new contracts for more Time Warner products and services. With the demerger, Time Warner can finally cut loose the strangling hold that American Online had imposed on the Time Warner’s unexpected saturated market segment (Khan, 2009). In the same manner, America Online can revert to its prior sole proprietorship type of corporation. Reverting to pre-merger status, America Online can remove the strangling hold Time Warner indirectly placed on the shackled new media company, America Online. As the name suggests, American online had previously been very successful in its new media market segment. The prior successes of America Online enticed Time Warner to seek a favorable merger with America Online on January 2001 (Slavin, 1989). There are advantages and disadvantages in mergers. One advantage is that the synergy benefit generated. Synergy can be explained in mathematical terms. The terms include one company plus one company equals more than two company’s benefits. In the merger between Time Warner and America Online, the two companies were expecting to generate lots of financial benefits. However, going into business includes some risks. The risks included a possible decline in the demand for the company’s products and services. When the demand declines, the company may succumb from the destabilizing effects of the merger. One such macroeconomic destabilizing effect is the retrenchment of employees. When this happens, the nation’s unemployment rate may increase. With a big company that includes the merger between Time Warner and America Online, there are more employees forced to leave the company’s premises, retrenchment (Baumol, 2011). With the merger proven an economic debacle, the two companies should not separate ways. Time Warner may create a merger with another more fluid and responsive company. The new company may blend well with Time Warner’s originally successful marketing strategies. With the new merger there is better probability that the economic demand for the Time Warner products will increase to their former profitable levels (Khan, 2009). In the same light, America Online’s proven mistake with the merger persuades the management to severe its merger ties with Time Warner. Time Warner may create a merger with another more fluid and responsive company. The new company may continue the same Time Warner originally profitable marketing and management plans. With the new merger there is new hope that the future economic demand for the America Online advertising and other products and services rise to economically feasible levels (Baumol, 2011). References: Albelda, R., 1999. Real World Microeconomics. New York: Saltus. Baumol, W., 2011. Economics: Principles and Policies. 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