What AOL proposed on Friday is that they wanted to have another 300M of shares to be placed at the company board's descretion. This does not necessarily mean that they are going to split the stock. They could theoretically use a part of the new allocation to split the stock (for example 3 for 2) and use the rest for other purposes. They could also use it all for a 2 for 1 split, but that does not require approval from share holders. So it is clear that that AOL wants to use some of the proceedings as capital, to acquire assets, take over other companies etc. It is also possible that they could use ALL of it for non-split purposes.
Now, any of this new stock not used for split purposes (i.e., not given back to existing share holders) results in dilution of stock. If they use all of it for raising capital or acquiring other companies, then the result is dilution of 50% for the existing stock holders.
There was a question raised on this board as to why the company stock did not go down because of this potential dilution. The reasons why it did not are * This is only a proposal and needs to be approved by holders * Dilution will take place only when the company get the approval and starts to issue these new shares, not when the proposal is approved. Thus, AOL can phase in dilution gradually. * AOL hopes that if it gets things right, it can offset this dilution by growing the business and increasing the value of shares. Apparently some people agreed with that line of reasoning today.
The main question that faces share holders in Feb is: Can I give back half of my holding value to AOL now with the hopes that they put that money to good use and make my remaining half more than double in a reasonable amount of time?
If you agree, you should support the proposal. If not, you should oppose it.
I just read about a joint venture between Yahoo and MCI to rival AOL. There's no way they can even come close. AOL is well established in the market. I doubt that the combined YAHOO & MCI internet service could even gain 1/10th of AOL's customers. What does the rogue's gallery think?
Yahoo already has 26 million users, more than double AOL. MCI has lower telephone costs since they own a portion of the backbone. They also have deep pockets. MCI-YHOO will be a formidable competitor, IMHO.
AOL is certainly a momentum investors dream, but when is the company finally going to report that it is in the black and earning healthy earnings to sustain the present P/E? I am long but I am beginning to get tired of the wait. You would think that with 10 million customers that the profits would be rolling in.