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Aol Latin America

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Using the bankruptcy prediction tool, decide if AOL Latin America will survive. The Altman Z-Scores computed for AOL Latin America since June 30th, 2000, consistently have negative scores. Since an Altman Z-Score below 1.81 suggests bankruptcy in the next 12 months, we can definitively state AOL Latin America is headed for bankruptcy. Additionally, the Altman Z-Score for AOL Latin America in December 31st, 2001 is 420% worse than the same score calculated in December 31st, 2000. This shows a fast deteriorating financial situation for AOL Latin America. This assessment is further validated when reviewing both Exhibit 3 and Exhibit 5 in the case study. The Income Statements for 2000 and 2001, as well as the Pro Forma Income Statements for 2002 and 2003, show that Total Revenues earned will be less than the Cost of Revenues for all 4 years. When additional expenses are thrown in, Total Revenue makes up only 7.01%, 22.52%, 32.17%, and 43.03% of the Loss from Operations for the years 2000 through 2003 respectively. Assuming a rate of 10% compounded growth in the ratio of Total Revenue to Loss from Operations, it is quite likely that AOL Latin America will require at least 7-8 years before breaking even.

Based on your answer to question 1, should AOL invest further funds?

Based on the above financial analysis AOL should not invest further funds. The US based AOLTW has already seen the boom and bust of the dot-com bubble as of December 31st, 2001, and is quite aware of similar balance sheets and income statements of the past darlings of the 'New Economy'. It should be able to draw similar parallels to what is going with AOL Latin America, and assess its risks similarly. Unfortunately, it is likely that since AOLTW was itself a result of the dot-com bubble, it lacked the necessary detachment to draw the necessary conclusions for its own Latin America unit.

Having the benefit of hindsight, we know that AOL Latin America finally filed for bankruptcy on 6/24/2005, after spending multi-millions of dollars more in a fruitless pursuit of its original strategy. -- http://www.usatoday.com/tech/news/2005-08-04-aol-latin-america_x.htm, accessed 5/30/2009.

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