The AOL/Time Warner Merger

Where Traditional Media Met New Media

Kamal Kishore Verma
Table of Contents

Executive Summary 2

Time Warner
History 3
Market Situation Prior Merger 4
Reasons for Merger 5

AOL
History 6
Market Situation Prior Merger 7
Reasons for Merger 8

Proposed Synergies 10

Proposed Valuation 12

Reasons for Merger Failure 13

Appendix 16

Works Cited 25

The AOL/Time Warner Merger 1

Where Traditional Media Met New Media

Kamal Kishore Verma

Executive Summary

The merger of AOL and Time Warner has been judged to be a merger between two companies in fear. AOL feared that its business
model needed continual adaptation to a changing internet and wanted to ensure broadband access. AOL needed to continue its growth
by acquisition strategy in order to justify its high market capitalization. Time Warner feared that its outdated network of traditional
media outlets (television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift. Time Warner believed that
for it to remain competitive it needed an immediate injection into the internet.

But mergers out of fear are rarely successful. The valuation that analysts predicted (above $90 per share) never persisted as the two
companies have not been able to fully integrate. AOL and Time Warner have not been able to formulate a strategy which can help the
combined company move forward, the managers have failed to win the support of all divisions, and the dynamics and technologies of
the internet have changed and have left AOL behind.

The AOL/Time Warner Merger 2

Where Traditional Media Met New Media

Kamal Kishore Verma

Time Warner
History

The history of Time Warner traces back to Warner Brothers. According to the popular legend, four brothers convinced their father to
sell his golden wristwatch and to buy one of the first cinematographs (Edison-cinetoscope). With this cinematograph, the four brothers
went from town to town showing films to the rural population. Later, they produced their own films. Warner Brothers has been
formally registered in 1923 in Hollywood. In 1925, Warner brothers went public and in 1930 they launched their popular cartoon
series. The Looney Tunes, such as Bugs Bunny and Daffy Duck were central figures and shaped the company’s image in the public.
Warner Brothers made a number of well-known classic films, such as Casablanca and a number of Hitchcock thrillers. Warner
Brothers also began to acquire many record labels.

In 1989, Warner Brothers merged with the publishing house Time to Time Warner. Time acquired Warner for about US$14 Billion and
transformed it into a multi-media company consisting of record labels, motion picture as well as television production and distribution,
studio facilities and film libraries, television networks, book and magazine publishing. In order to increase its product portfolio Time
Warner acquired Turner Broadcasting System in 1996 and hence became the second largest cable television network. Its’ printing arm
could secure more than 20% of all expenses for print advertisement in 2000 in the US, which makes it the dominant player. The
history of the company shows that Time, Warner, and Turner Broadcasting grew through acquisition strategies (Exhibit 1: Time
Warner History).

The AOL/Time Warner Merger 3

Where Traditional Media Met New Media

Kamal Kishore Verma

Market Situation Prior Merger

In 2000 it was believed that future media growth motor would be the from the “new” media sector. Traditional and new media
channels were rapidly converging into common media platforms. The industry believed that companies operating in one media
channel only, either the traditional or the new media could not play a significant role in the future or, even worse, would vanish.
Successful companies will harness the Internet’s nearly infinite customer reach and provide high-quality media contents, such as
entertainment and information to its’ worldwide customers.

The companied merged in January 2000, before the bursting of the over-valuations of internet companies. Therefore, from a
standpoint of Time Warner at that time, the high expectations to regain growth momentum from a leading Internet player such as AOL
seemed justified. Supernormal growth period growth rates were in hindsight over inflated, but followed the subscription growth of
AOL and other online players (Exhibits 6-17). The later downward spiral of AOL Time Warner’s development reflects the loss in
confidence of the market in the Internet and is somewhat symbolic for the burst of the Internet bubble.

Exhibit 5 shows a steady increase in stock prices of AOL until 1999. It was only interrupted by a brief phase of decline in 1996, which
coincides with the purchase of Turner Broadcasting Systems. In 1999, however, it began to remain steadily fluctuating around a mean
value of about $60. This may indicate that the competitive advantage of AOL was not sustainable any more and may indicate the
financial translation of the rationale behind the merger.

The AOL/Time Warner Merger 4

Where Traditional Media Met New Media

Kamal Kishore Verma

Reasons for the Merger

For Warner, merging with an existing company was a more effective way to distribute its contents via online channels as opposed to
building its own capabilities. Creating an own Internet branch would be both very costly and time intensive. The combination of Time
Warner’s broadband systems, media contents and subscriber base would create significant synergies and strategic advantages with
AOL’s online brand, Internet infrastructure and own subscriber base of 30 million customers. The mostly untapped AOL subscriber
base and the e-platform, which promises new service and revenue opportunities, and cross-marketing opportunities, will provide
growth potential. The combination of two global players will further increase scale and scope of the new company thus strengthening
its international position. As already mentioned, Time Warner intends to combine its media contents with the new distribution
possibilities AOL’s strong Internet presence provides. The high-quality contents in combination with interactive services available on
the internet at any time the customer desires will result in increased benefits for consumers and translates into revenue growth.

The AOL/Time Warner Merger 5

Where Traditional Media Met New Media

Kamal Kishore Verma

AOL
History

AOL was founded in 1985 under the name Quantum Computer Systems, as a popular interactive services firm providing content and
services to residential customers via dial-up modems. Originally, customers who subscribed to AOL were limited to AOL content and
e-mail (as was typical of online service providers at the time). AOL was the first on-line service requiring the use of proprietary
software, instead of a terminal standard program, resulting a graphical user interface well ahead of the competition (AOL was
considered the online service for people unfamiliar with computers, in contrast to its main competitor CompuServe, who was oriented
to the technical community). As the Internet grew in popularity, AOL also provided Internet access to the World Wide Web in
addition to its proprietary content. In 1991 it changed it name to America Online Inc. The simple intuitive interface and an aggressive
marketing led the company to extremely rapid growth in the late 1990s, fueled by a large number of acquisitions and geographical
expansion. AOL aggressively pursued an acquisition strategy to increase its online presence and desire to provide members with
original, interactive, and needed content (Exhibit 2).

The AOL/Time Warner Merger 6

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Market Situation Prior Merger

At the time of the merger, AOL had 27 million subscribers, amounting to about 40% of total US online subscribers. AOL grew in just
eight years from a small Internet start-up, competing with the likes of Prodigy and the commented CompuServe (which was acquired
in 1998), into a media conglomerate. On the way, the drivers of its profitability and growth have shifted from subscriptions and usage
time to advertising and e-commerce deals.

Despite the change in its strategy, one of AOL's features has been its pursuit to make ensure that investors understand its business
model. Since 1996, when it began its transformation from computer-networking company to media giant, AOL made changes in its
strategic direction to the investment community, even when doing so might have seemed perverse or damaging. The market registered
with strong approval. AOL's stock price increased 1,468% from October 1996 to January 2001, compared with a 100% increase in the
S&P 500, which AOL joined in December 1998.

The AOL/Time Warner Merger 7

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Reasons for Merger

The reason for the merger was allow each of the companies to get a piece of the Internet future which each of the companies could not
provide for individually. For AOL, the merger was about technology: America Online was the dominant leader in what might be
termed the sort of first stage of Internet usage, that is, people was going on-line for e-mail and Web surfing. But AOL did not have a
strategy for the next generation of internet users who would require broadband access (where access to the Internet would be much
faster and would allow users the ability to complete much more complicated tasks like media downloading, telephony, gaming, virtual
offices, etc):
On the surface, what happened Monday is simple: AOL, the leading provider of dialup Internet service, needed a strategy
for moving its customers forward into the much-ballyhooed world of high-speed "broadband" access, controlled by
telephone companies and cable TV operators (such as Time Warner). Time Warner, the ungainly media conglomerate,
needed a credible way to salvage its Internet strategy after a decade of failure in the digital realm -- from the colossal flop
of its "Full Service Network" interactive television experiment to the spectacular flameout of its misconceived Pathfinder
Web portal.

Put the two companies together and you get something like Monday morning's press conference announcing the deal: A
torrent of references to "synergy," "one plus one equals three," "the media value chain," "the convergence of media,
entertainment and communications," and "new benefits to consumers." You also get an avalanche of hype: One analyst
declared, "It is probably the most significant development in the Internet business world to date."1
For AOL’s Board of Directors, the portfolio of brands created with the merger of the two companies would cover the full spectrum of
media entertainment and information, and this would led the company increase the revenues at the three major areas that had AOL:
subscriptions, advertising and e-commerce and content. They believed that Time Warner’s cable systems would expand the broadband
delivery systems for AOL computer service’s technology and, over all, they assured that the new business would be benefited from
huge operating synergies (cross-promotion, more efficiency in marketing, cost reductions in launching and operating new
technologies) as well as major new business opportunities.

AOL’s subscriber base and advertising revenues were growing exponentially until the crash of 2000 occurred. AOL suffered
increasing demand from Wall Street to generate big advertising deals to meet rising expectations. When this failed, AOL resorted to
unconventional methods to boost its financial numbers (utilizing legal action for an ad deal, booking E-Bay ad revenues as their own).
AOL stock was severely overvalued and this merger was the only way to prevent a collapse in valuation. AOL, as the new corporate
giant created by the Internet boom, was using its sky-high value of its stock to acquire an older Fortune 500 company. AOL's high
market capitalization relative to that of Time Warner made the acquisition possible.

1
Rosenberg , Scott. “AOL and Time Warner's marriage of insecurity”. Salon.com Technology. Jan 10, 2000.
http://archive.salon.com/tech/col/rose/2000/01/10/aol_time/index.html.

The AOL/Time Warner Merger 8

Where Traditional Media Met New Media

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Proposed Synergies

When AOL and Time Warner announced their merger in 2000 they had a clear vision of their synergies. AOL believed that the
combined companies had the means to be uniquely positioned in order to bring interactive media into customers’ everyday lives and to
further penetrate this market.
The merger will combine Time Warner's vast array of world-class media, entertainment and news brands and its
technologically advanced broadband delivery systems with America Online's extensive Internet franchises, technology and
infrastructure, including the world's premier consumer online brands, the largest community in cyberspace, and unmatched
e-commerce capabilities. AOL Time Warner's unparalleled resources of creative and journalistic talent, technology assets
and expertise, and management experience will enable the new company to dramatically enhance consumers' access to the
broadest selection of high-quality content and interactive services.

By merging the world's leading Internet and media companies, AOL Time Warner will be uniquely positioned to speed the
development of the interactive medium and the growth of all its businesses. The new company will provide an important
new broadband distribution platform for America Online's interactive services and drive subscriber growth through cross-
marketing with Time Warner's pre-eminent brands.2
AOL at that time was believed to have the necessary experience to help Time Warner transform their divisions to the digital channels.
Additionally Time Warner was believed to help AOL build next generation broadband. Together with Time Warner, AOL believed they
could build a set of brands customers trusted in. Additionally, AOL Time Warner thought of building up facilities beyond just personal
computers but also involving wireless devices, television, phones or PDAs. With the help of Time Warner AOL thought it could
deliver any kind of content at any time to any place (AOL Anywhere). As most likely synergies of the merger the board of AOL
regarded cost reductions and opportunities of growth. Revenue opportunities were seen in areas such as advertising, growth
opportunities were seen in increased numbers of cross-promotion and –marketing for Time Warner’s content through the channels of
AOL. Efficiency increases were seen in marketing across different platform and distribution systems, cost synergies were likely to
arise due to shared business functions (i.e. R&D and cost efficiencies because of launching interactive extensions of Time Warner
Brands).

Time Warner, in general, believed that through the integration of traditional and new media and communication and business
technology the new company would be uniquely positioned in order to have a strong basis and take full advantage of the digital
revolution. From Time Warner’s view this strategic advantage emerged from “multiple brands, vast array of content, extensive
infrastructure and strong distribution capabilities” and that therefore the value of AOL Time Warner combined will be higher than the
value of the single companies. Time Warner regarded AOL’s extensive Internet infrastructure as a new distribution medium for its
brands and content. Also Time Warner believed its broadband system was an ideal distribution platform for AOL’s interactive services.
Furthermore, AOL’s e-commerce system was regarded to be an opportunity to promote Time Warner’s music labels. Linking Time
Warner’s established brands with AOL’s interactive services promised opportunities for subscriber growth. Finally, the Time Warner
board thought that through the merger the international position of the brand would be strengthened as well as the benefit for
consumers increased.3

2
“Press Releases, News Room”. TimeWarner. Jan 10,2000. http://www.timewarner.com/corp/newsroom/pr/0,20812,667602,00.html.
3
“The AOL/Time Warner Merger, Part One”. pp. 223 – 230.

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Where Traditional Media Met New Media

Kamal Kishore Verma

Proposed Valuation

The hype surrounding the AOL and Time Warner merger was fueled by and in turn helped to refuel the growing internet bubble. Wall
Street analysts, internet gurus, and media moguls all hoped that this newly formed company would successfully integrate traditional
forms of media with the new. A valuation of these two companies was complicated and unprecedented. This was the largest corporate
merger to date and no one knew for certain what types of synergies and growth rates would be possible for the two companies.

Under the assumptions of a 25% supernormal growth rate and a 5% terminal period growth rate the valuation of the company was
over $93 per share (Exhibits 7, 8, and 17). While these growth rates were reasonable in the context of the environment of the late
1990s their sustainability was never questioned. Many questions remained unanswered. Could AOL continue to grow subscriptions
and advertising revenues? Could AOL take advantage of Time Warner’s extensive cable network (if so what would this cost and how
long before it materialized)? Could two large behemoths merge together? Was it AOL saving Time Warner or vice versa? The
sensitivity tables attempts to answer some of these questions with technical analysis and try to judge their impact upon the share price
of the newly formed firm (Exhibits 7-17). It is clear that the growth assumed in 2000 never occurred. A more realistic supernormal
growth rate for the two companies would have judged their synergies to deliver 5-7% growth for the short term.

The AOL/Time Warner Merger 10

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Reasons for Failure

Viewing back upon the merger several reasons can be found why the merger did not work out as the former managements had hoped it
would. One of the main reasons is that AOL basically never was an equal counterpart to Time Warner. At the time of the merger AOL’s
stocks were overvalued mainly due to the Internet bubble4. During the 1990 many upcoming Internet start-ups, the so-called dotcoms,
were tremendously overvalued and to some extent without ever having made profit worth as much as established blue-chip companies
because investors believed in their potential. Indeed only a few companies survived the “new economy”-era and are now established
companies (e.g. Amazon or EBay). Since, however, AOL according to its stock price was worth as much as Time Warner at the time of
the merger they got the same voting rights and power. There still exists much controversy around Case’s profit taking from the sale of
his shares (Exhibit 4):
The fact that Case sold a major part of his AOL stock soon after the merger was announced in January 2000 (when the
price of the stock was high) and made an estimated profit of $ 160 million evoked suspicion and anger among
shareholders. They thought that Case was aware of the fate of the merger and accused him of making money, when the
time was right, at the expense of the shareholders.5
Yet, today AOL is certainly less worth than Time Warner. So, from today’s perspective AOL received a too high price for its share or
Time Warner paid too much for what it received in return. The stock price of AOL Time Warner fell from its peak of almost 90 US$ in
2001 down to almost 10 US$ in 2003 and right now is just at 13 US$. Also, since AOL turned out to be an unequal partner AOL Time
Warner changed its name back to just Time Warner in the mean time and almost the whole AOL board has been replaced while still
many of Time Warner’s directors are in charge6.

Another reason why the merger failed is that in the time after the merger AOL and Time Warner failed to implement their visions and
communicate them – e.g. marketing Time Warner content through all channels possible. Additionally, they even lacked the ability to
recognize new trends in the digital industry. One trend apart from broadband Internet was Internet telephony or Voice over IP (VoIP).
AOL Time Warner as the main player in the digital revolution – as they defined themselves – hardly took notice of this trend and they
failed to build a business model for that. Secondly, they were not able to promote their idea of a combined music-platform. Again, it
was another company to gain the first mover advantage in this area (Apple with their introduction of the iTunes Music Store). And
thirdly, one of the main trends AOL Time Warner missed in the recent years was the importance of highly personalized web services.
Examples are MySpace.com, a platform for everyone to express oneself, which was bought by Rupert Murdoch’s News Corp. last
year for about $580 million7 or Snapfish, a service that allows everyone to store pictures online and make them publicly available.
AOL Time Warner in contrast believed that delivering serious news and facts was more promising than highly personalized content.8

A new thread came up for AOL in the recent years. AOL used to be the most important Internet Service Provider in many countries.
However, they failed to offer broadband access as soon as possible. So it was the local phone companies to have the first mover
advantage9. As a consequence of this not only lost AOL subscribers to their Internet service but also their portal lost importance
leading to a loss in opportunity to promote AOL Time Warner content10. As a further consequence income from advertising is
decreasing.11

Furthermore, the CEOs at the time of the merger, Mr. Case and Mr. Levin, still today regard themselves as being the wrong persons for
having done the job at that time. In an interview Case states that not only him but also the whole board of directors in each of the
companies really believed in the success of his idea; yet he admits that he was the one to blame for the failure since it was his idea.
Indeed at that time AOL needed Time Warner’s broadband and cable business as a strong partner for further growth12. In contrast, it is
to question whether Time Warner really needed AOL or whether a strategic partnership wouldn’t have been the better choice13. One
major mistake seems to have been in the assumptions about the merger itself. Time Warner was thinking it was they to mainly benefit
from the merger since they could access AOL’s media channels and promote their content through it. AOL in contrast was the party
that gained most through the merger because they were able to use Time Warner’s broadband cable network and extend their
broadband business.14

4
Knowledge@Wharton. “Giving Up on AOL Time Warner”. March 2, 2003. http://news.com.com/2009-1069-
990592.html?tag=fd_nc_1.
5
“AOL Time Warner: A Merger Gone Wrong?”.
file:///c:/Documents/MBA/Classes/Current/M&A/AOL%20TimeWarner/Internet%20Files/Case.htm.
6
Kane, Margaret. “Case resigns as AOL chairman”. ZDNet News. January 13, 2003. http://news.zdnet.com/2100-9595_22-
980284.html?tag=nl
7
Scott-Joynt, Jeremy. “What Myspace means to Murdoch”. BBC News. Tuesday, 19 July, 2005.
http://news.bbc.co.uk/1/hi/business/4697671.stm.
8
Knowledge@Wharton. “Giving Up on AOL Time Warner”. March 2, 2003. http://news.com.com/2009-1069-
990592.html?tag=fd_nc_1.
9
Hu, Jim. “AOL slims to grow” ZDNET News. December 3, 2004. http://news.zdnet.com/2100-9588_22-5476755.html?tag=nl
10
Hu, Jim. “Case accepts blame for AOL-Time Warner debacle”. ZDNet News. January 12, 2005. http://news.zdnet.com/2100-
9588_22-5534519.html.
11
Knowledge@Wharton. “Giving Up on AOL Time Warner”. March 2, 2003. http://news.com.com/2009-1069-
990592.html?tag=fd_nc_1.
12
http://news.zdnet.com/2100-9588_22-5534519.html
13
Knowledge@Wharton. “Giving Up on AOL Time Warner”. March 2, 2003. http://news.com.com/2009-1069-
990592.html?tag=fd_nc_1.
14
Aa, Stephen. “AOL-Time Warner: Myths and Facts”. The MotleyFool. April 29, 2002.
http://www.fool.com/community/pod/2002/020429.htm.

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A final reason for the failure is the fact that AOL and Time Warner were not able to encourage a climate within the companies to
initiate the synergies that were proposed. As Peter S. Fader, a Wharton marketing professor, says it is impossible to manufacture
synergies, oftentimes they are just nothing more than serendipities.15 A clear and concise strategy never emerged from the two
companies:
Wharton business and public policy professor Gerald Faulhaber has heard this spiel before. “AOL is an enormous asset, but
it has a management problem,” says Faulhaber. “AOL has the audience, but Time Warner has demonstrated that it doesn't
know how to take advantage of it.” There are plenty of unanswered questions about AOL, Faulhaber adds. For example,
what does AOL have to become in the future? What can AOL create that's unique? How can it garner profits from its
instant messaging dominance? How will it convince its customers to stick with AOL as broadband Internet access grows in
popularity?16
Even though there was hope for a complete integration of the companies and the ability of both companies to leverage the others
strengths, this never materialized. The integration of services which was editorialized by many cartoonists (Exhibit 3) never occurred.

15
Knowledge@Wharton. “Giving Up on AOL Time Warner”. March 2, 2003. http://news.com.com/2009-1069-
990592.html?tag=fd_nc_1.
16
Knowledge@Wharton. “AOL: In Search of a New Strategy”. Nov 11, 2005.
file:///c:/Documents/MBA/Classes/Current/M&A/AOL%20TimeWarner/Internet%20Files/Future%20Strategy.htm.

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Appendix

Exhibit 1: Time Warner History17

17
“Who Owns What: Time Warner Corporate Timeline”. CJR America’s Premier Media Monitor, Columbia Journalism Review.
http://www.cjr.org/tools/owners/timewarner-timeline.asp.

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Exhibit 2: AOL History18

18
“Who We Are: Leadership. Innovation. Commitment to Members.” AOL.com. http://www.corp.aol.com/whoweare/history.shtml.

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Exhibit 3: Merger Sentiment

Exhibit 4: Merger Sentiment

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Exhibit 5: Adjusted Closing Share Price and Daily Trade Volume – TWX19

100 450,000,000

90
400,000,000

80
350,000,000

70
300,000,000
Adjusted Closing Price

60

250,000,000

Volume
50

200,000,000

40

150,000,000
30

100,000,000
20

50,000,000
10

0 0
Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06
Adj. Close* Volume

Exhibit 6: Sensitivity Analysis for Operating Margin

%
Operating Margin Value / Share Change
20% $ 66.03 -30%
22% $ 72.95 -22%
24% $ 79.87 -15%
26% $ 86.79 -7%
28% $ 93.71 0%
30% $ 100.63 7%
32% $ 107.55 15%
34% $ 114.47 22%
36% $ 121.39 30%

19
“Historical Prices”. Yahoo Finance. http://finance.yahoo.com/q/hp?s=TWX.

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Exhibit 7: Sensitivity Analysis for Supernormal Growth Period Growth Rate

Supernormal Growth
Period Growth Rate Value / Share % Change
5% $ 17.93 -81%
10% $ 28.07 -70%
15% $ 42.75 -54%
20% $ 63.81 -32%
25% $ 93.71 0%
30% $ 135.70 45%
35% $ 194.06 107%
40% $ 274.38 193%
45% $ 383.83 310%

Exhibit 8: Sensitivity Analysis for Terminal Period Growth Rate

Terminal Period
Growth Rate Value / Share % Change
1% $ 66.89 -29%
2% $ 71.58 -24%
3% $ 77.32 -17%
4% $ 84.49 -10%
5% $ 93.71 0%
6% $ 106.00 13%
7% $ 123.21 31%
8% $ 149.03 59%
9% $ 192.06 105%

Exhibit 9: Sensitivity Analysis for Supernormal Growth Period Depreciation Rate

Supernormal Growth
Period Depreciation
Rate Value / Share % Change
1% $ 85.59 -9%
2% $ 87.22 -7%
3% $ 88.84 -5%
4% $ 90.46 -3%
5% $ 92.09 -2%
6% $ 93.71 0
7% $ 95.33 2%
8% $ 96.95 3%
9% $ 98.58 5%
10% $ 100.20 7%

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Exhibit 10: Sensitivity Analysis for Terminal Period Depreciation Rate

Terminal Period
Depreciation
Rate Value / Share % Change
0% $ 89.66 -4%
0.5% $ 91.68 -2%
1.0% $ 93.71 0%
1.5% $ 95.73 2%
2.0% $ 97.76 4%
2.5% $ 99.78 6%
3.0% $ 101.81 9%

Exhibit 11: Sensitivity Analysis for Supernormal Growth Period Working Capital Expenditures

Supernormal Growth
Period Working
Capital Expenditures Value / Share % Change
0.0% $ 96.95 3%
0.5% $ 96.14 3%
1.0% $ 95.33 2%
1.5% $ 94.52 1%
2.0% $ 93.71 0%
2.5% $ 92.90 -1%
3.0% $ 92.09 -2%
3.5% $ 91.27 -3%

Exhibit 12: Sensitivity Analysis for Terminal Period Working Capital Expenditures

Terminal Period
Working Capital
Expenditures Value / Share % Change
0% $ 93.71 0%
0.5% $ 91.68 -2%
1.0% $ 89.66 -4%
1.5% $ 87.64 -6%
2.0% $ 85.61 -9%

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Exhibit 13: Sensitivity Analysis for Supernormal Growth Period Capital Expenditures

Supernormal Growth
Period Capital
Expenditures Value / Share % Change
0.0% 98.58 5%
0.5% 97.77 4%
1.0% 96.95 3%
1.5% 96.14 3%
2.0% 95.33 2%
2.5% 94.52 1%
3.0% 93.71 0%
3.5% 92.90 -1%
4.0% 92.09 -2%
4.5% 91.27 -3%
5.0% 90.46 -3%

Exhibit 14: Sensitivity Analysis for Terminal Period Capital Expenditures

Terminal Period
Capital
Expenditures Value / Share % Change
0% 97.7576687 4%
0.5% 95.73332635 2%
1.0% 93.70898399 0%
1.5% 91.68464164 -2%
2.0% 89.66029929 -4%

Exhibit 15: Sensitivity Analysis for Supernormal Period Cost of Capital

Supernormal Growth
Period Cost of Capital Value / Share % Change
2% 191.40 104%
4% 159.20 70%
6% 132.93 42%
8% 111.41 19%
10% 93.71 0%
12% 79.08 -16%
14% 66.95 -29%
16% 56.85 -39%
18% 48.40 -48%
20% 41.31 -56%

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Exhibit 16: Sensitivity Analysis for Terminal Period Cost of Capital

Terminal Period
Cost of Capital Value / Share % Change
2% -136.796132 -246%
4% -459.5032943 -590%
6% 508.6181927 443%
8% 185.9110304 98%
10% 121.3695979 30%
12% 93.70898399 0%
14% 78.34197626 -16%
16% 68.56297134 -27%
18% 61.79289101 -34%
20% 56.82816544 -39%

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Exhibit 17: Sensitivity Analysis for Terminal Period Growth Rate versus Supernormal Growth Period Growth Rate

Terminal Period Growth Rate

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
0% $ 7.69 $ 8.11 $ 8.62 $ 9.23 $ 10.00 $ 10.99 $ 12.31 $ 14.16 $ 16.93 $ 21.55 $ 30.79
1% $ 8.53 $ 8.99 $ 9.55 $ 10.23 $ 11.08 $ 12.17 $ 13.63 $ 15.67 $ 18.74 $ 23.84 $ 34.05
2% $ 9.43 $ 9.94 $ 10.56 $ 11.31 $ 12.25 $ 13.45 $ 15.06 $ 17.31 $ 20.69 $ 26.32 $ 37.59
3% $ 10.40 $ 10.96 $ 11.64 $ 12.47 $ 13.50 $ 14.83 $ 16.61 $ 19.09 $ 22.81 $ 29.02 $ 41.44
4% $ 11.44 $ 12.06 $ 12.80 $ 13.72 $ 14.86 $ 16.32 $ 18.27 $ 21.01 $ 25.11 $ 31.95 $ 45.63
5% $ 12.55 $ 13.24 $ 14.06 $ 15.06 $ 16.32 $ 17.93 $ 20.08 $ 23.09 $ 27.60 $ 35.13 $ 50.18
6% $ 13.75 $ 14.50 $ 15.41 $ 16.51 $ 17.89 $ 19.66 $ 22.03 $ 25.34 $ 30.30 $ 38.57 $ 55.12
7% $ 15.04 $ 15.87 $ 16.86 $ 18.07 $ 19.59 $ 21.53 $ 24.13 $ 27.76 $ 33.22 $ 42.31 $ 60.48
Supernormal Growth Period Growth Rate

8% $ 16.43 $ 17.33 $ 18.42 $ 19.75 $ 21.41 $ 23.55 $ 26.40 $ 30.39 $ 36.37 $ 46.35 $ 66.30
9% $ 17.91 $ 18.91 $ 20.10 $ 21.56 $ 23.38 $ 25.72 $ 28.85 $ 33.22 $ 39.79 $ 50.72 $ 72.60
10% $ 19.51 $ 20.60 $ 21.90 $ 23.50 $ 25.50 $ 28.07 $ 31.49 $ 36.28 $ 43.47 $ 55.46 $ 79.42
11% $ 21.22 $ 22.41 $ 23.84 $ 25.59 $ 27.78 $ 30.59 $ 34.34 $ 39.58 $ 47.46 $ 60.57 $ 86.81
12% $ 23.06 $ 24.36 $ 25.92 $ 27.84 $ 30.23 $ 33.30 $ 37.40 $ 43.14 $ 51.75 $ 66.10 $ 94.80
13% $ 25.02 $ 26.45 $ 28.16 $ 30.25 $ 32.87 $ 36.23 $ 40.71 $ 46.98 $ 56.39 $ 72.07 $ 103.44
14% $ 27.14 $ 28.69 $ 30.56 $ 32.85 $ 35.70 $ 39.37 $ 44.26 $ 51.12 $ 61.39 $ 78.52 $ 112.78
21% $ 46.79 $ 49.62 $ 53.01 $ 57.15 $ 62.33 $ 69.00 $ 77.88 $ 90.31 $ 108.96 $ 140.04 $ 202.20
22% $ 50.44 $ 53.51 $ 57.19 $ 61.69 $ 67.32 $ 74.55 $ 84.19 $ 97.69 $ 117.94 $ 151.69 $ 219.18
23% $ 54.35 $ 57.68 $ 61.67 $ 66.55 $ 72.66 $ 80.50 $ 90.97 $ 105.61 $ 127.58 $ 164.20 $ 237.44
24% $ 58.52 $ 62.13 $ 66.46 $ 71.75 $ 78.37 $ 86.88 $ 98.22 $ 114.11 $ 137.93 $ 177.64 $ 257.05
25% $ 62.97 $ 66.89 $ 71.58 $ 77.32 $ 84.49 $ 93.71 $ 106.00 $ 123.21 $ 149.03 $ 192.06 $ 278.11
30% $ 90.20 $ 95.99 $ 102.94 $ 111.43 $ 122.05 $ 135.70 $ 153.89 $ 179.37 $ 217.59 $ 281.28 $ 408.66
31% $ 96.78 $ 103.04 $ 110.54 $ 119.71 $ 131.17 $ 145.90 $ 165.55 $ 193.05 $ 234.31 $ 303.08 $ 440.60
32% $ 103.80 $ 110.55 $ 118.64 $ 128.53 $ 140.90 $ 156.80 $ 178.00 $ 207.68 $ 252.19 $ 326.39 $ 474.79
33% $ 111.27 $ 118.55 $ 127.28 $ 137.95 $ 151.28 $ 168.43 $ 191.29 $ 223.29 $ 271.30 $ 351.31 $ 511.34
34% $ 119.23 $ 127.07 $ 136.48 $ 147.98 $ 162.35 $ 180.83 $ 205.47 $ 239.97 $ 291.71 $ 377.95 $ 550.42
35% $ 127.71 $ 136.15 $ 146.29 $ 158.67 $ 174.16 $ 194.06 $ 220.60 $ 257.76 $ 313.50 $ 406.39 $ 592.18
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