Accounting For Gains

As AOL Time Warner wraps up its annual analysis of potential goodwill impairments by year-end, some investors are nervous that the world's largest media conglomerate will take another big non-cash write-down to adjust for the fallen value of its ailing online unit.

While such a write-down could be a near-term hit to the company's stock, analysts say AOL TW's share price seems to have bottomed out, and most investors are likely to focus more on actual business trends than accounting conventions going forward.

"What will drive media and entertainment stocks from here is the economic outlook and how advertising and business are doing," said Kaufman Bros. analyst Paul Kim. "Accounting issues are mostly behind us. The market doesn't care about that anymore. It's all about fundamentals now."

Without much fanfare, AOL Time Warner shares have crept up 30% since the beginning of October after declining for most of the year. Analysts say CEO Dick Parsons has made the company's balance sheet more transparent and started to address key business challenges.

The picture was much different earlier this year, when AOL TW posted a record loss of $54.2 billion for its first quarter because of the largest charge in U.S. corporate history — $54 billion. The non-cash write-down marked the difference between the book value of the combined AOL TW and the price paid in the merger that created the company.

In recent weeks, AOL TW executives have flagged another markdown for the fourth quarter, but they also emphasized that they won't put a dollar value on it until later in the year. An AOL TW regulatory filing last week hinted in the same direction. Wall Street observers expect the company to announce the write-down in its fourth-quarter earnings report in January or February.

But while some investors are discussing the likely size of the write-down, most analysts show little interest.

Guzman & Co. analyst David Joyce estimates the write-down at $10 billion or less, but says "it should be no surprise or shock to anyone." Another Wall Street observer says, "I much more care to hear about how AOL is trying to turn around its sluggish subscriber and advertising momentum."

Kim projects a write-down of $10 billion-$30 billion, but also shows no sense of alarm. "It's just an accounting convention that has no cash effect," even though it symbolizes that the AOL-Time Warner merger was too expensive, he says. "The stock market usually accounts for stuff like this ahead of time."