David L. Bahnsen, FOUNDER, MANAGING PARTNER, AND CHIEF INVESTMENT OFFICER of the Dividend Cafe, writes a daily market observation. He just wrote a brilliant description of the worst business deal in history which occurred 25 years ago at the height of the dot-com bubble in 2000.
Time Warner, an old-time media company with excellent cash flow and dividends, was purchased by AOL, a new internet company with lower earnings, no dividend and P/E ratio of 200 using AOL’s bubble-inflated stock (not cash) to pay for the purchase.
Quote:
A Deal Gone Bust
Their 2002 write-down of $99 billion was the largest write-down in corporate history. That record holds today. Why does this matter? It was not an operating loss – i.e., spending $150 billion on expenses but only bringing in $50 billion of revenue, so a loss of $100 billion – it was a “goodwill impairment.” Sounds fancy, right? It’s actually vitally important. AOL bought Time Warner, and Time Warner had X amount of value on its balance sheet in assets – properties, intellectual property, business units (valued based on earnings), etc. AOL was buying it for more than the value of those assets, so that “intangible” value is referred to in accounting jargon as goodwill. There are all sorts of legitimate reasons one may pay more than the value of tangible assets. Some strategic factors or an optimistic view about the future could provoke a company to “pay up” – and almost always does (otherwise, why would a deal happen?). But the issue here is not what AOL paid for Time Warner, but how they paid for it – with AOL stock that was in a monumental and unsustainable bubble. [end quote]
@steve203 just posted “How Things Work in Shiny-land” about how Paramount management is trying to sell the company to Sky Dance. The government has a say, in whether the merger can happen, or not.
I don’t know anything about this merger. But Paramount, like Time Warner, is an old-line media company with many valuable properties, including CBS. Skydance Media is a privately held company and does not have a stock price that is publicly traded. It is not listed on any stock exchanges, such as the NYSE or NASDAQ. Therefore, there is no Skydance Media stock price available to the public.
Paramount pays a 1.55% dividend despite having negative earnings. Paramount hit a high of about 65 in 2021 but trades about 13 now.
Paramount shareholders have already seen major destruction of their value. Maybe the takeover of Paramount by Skydance will be good for Paramount shareholders. I don’t know anything about Skydance so I don’t know whether this takeover will improve the profitability of the merged company or destroy it.
But it’s worth noting that the stock market is in a similar frenzy over AI today as it was over dot-com companies in 2000. Nvidia has a P/E ratio of 55. As of July 17, 2025, the value of NVIDIA (NVDA) based on its stock market capitalization is approximately $4.23 trillion.
As of mid-July 2025, the Magnificent Seven stocks represent approximately 32% of the S&P 500 index.
On July 1, 2025, the S&P 500 index had a market capitalization of $52.831 trillion. The S&P 500 index itself represents approximately 80% of the total U.S. equity market capitalization. “Domestic equity” index funds and ETFs held $11.67 trillion as of May 2025.
Every bubble in history seemed like an exciting, great opportunity as it was inflating. (cf. “Manias, Panics and Crashes,” by Charles Kindleberger – great summer reading, by the way.)
The many investors who follow the crowd into can’t-lose index funds may turn out to break the record of “worst business deal in history.” It may take years to recover.
Wendy
For reference, the nominal Gross Domestic Product (GDP) for the first quarter of 2025 (January, February, and March) reached $29.962 trillion at a seasonally adjusted annual rate.