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The AOL/Time Warner Merger

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Warner feared that its outdated network of traditional media outlets (television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.

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
companys 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).

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 Internets 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 Warners 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.
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
Warners broadband systems, media contents and subscriber base would create significant
synergies and strategic advantages with AOLs 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 AOLs 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.
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 email (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).
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.
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 muchballyhooed 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 AOLs 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 Warners
cable systems would expand the broadband delivery systems for AOL computer services
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.
AOLs 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.
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 ecommerce 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 Warners 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 Warners 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 AOLs 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 AOLs interactive services. Furthermore,
AOLs e-commerce system was regarded to be an opportunity to promote Time Warners
music labels. Linking Time Warners established brands with AOLs 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
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 Warners 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.
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 AOLs
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 Cases 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 todays 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
Warners 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 Murdochs 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 Warners 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 wouldnt 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 AOLs 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 Warners broadband cable network and extend their broadband business.14
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.

AOL Time Warner

On January 10, 2002, American Online (AOL) and Time Warner


announced the second largest merger in history. The initial valuation
placed on the deal was $166 billion. The deal merged the
worlds largest Internet service provider, AOL, with Time Warner,
one of the largest media companies featuring magazines, movies,
cable networks, and music producers. Time Warner was a combination
of a prior merger between Time, Inc. and Warner Brothers. The
AOLTime Warner deal proved to be a disaster for its shareholders,
especially Time Warner shareholders. At the time, AOL shares were
highly valued, thereby allowing those shareholders to receive 55% of
the combined company, with Time Warner shareholders getting the
remaining 45%. As bad as the stock of the combined company performed
after the merger, AOL shareholders were probably better
off being combined with Time Warner because that unit continued
to perform well after the deal, whereas the AOL side suffered and
pulled down the overall company. In light of this, we would expect
that AOL shareholders would have been worse off if they had not
had Time Warners performance to offset their losses.
Therefore, it would seem that AOL could thank its chairman,
Steve Case, for at least finding a good partner to merge with using
its overvalued stock. He negotiated an all-stock, no-collar deal with
Gerald Levin of Time Warner, who did this deal as his last hurrah.
Time Warner shareholders probably wished he had retired earlier
than April 2002 when he finally stepped down from the failing
media giant. Levin, who had a 30-year history with the company and
its predecessors, had a good track record up to that point. He could
not pass up this huge deal and eagerly accepted overvalued AOL
stock for his company. Those same shareholders, however, cannot thank
him for managing the company well because its postmerger performance
was very bad.
It was amazing that somewhere in the negotiation process Levin
did not pause and consider that AOL stock was valued at 231 times
cash flow!1 The deal was labeled a merger of equals, but as we have
seen with other deals given that same label, one party usually quickly
becomes the dominant entity. Levin and Time Warner wanted the
combined company to be split 50:50, while Case offered a 60:40 split.
Levin compromised with a 55:45 deal,2 even though AOL added less
than 20% of the total revenues and less than one-third of the combined
companys cash flows.
At the onset of the deal, it was more of an acquisition of Time
Warner by AOL than a merger of equals. Time Warner management
reluctantly put up with this situation until AOL began pulling down
the combined company.
PRIOR DEALS BY THE MERGER PARTNERS
Before the AOL deal, Time Warner was involved in some large mergers
that generally worked out well. The main one was the merger
between Time and Warner in 1989. This deal become a hotly contested
hostile battle as Paramount emerged with a counterbid and
sought to transform the merger of equals into an auction. Paramount
lost this argument in the Delaware courts and the deal went forward.
Time Warner was run for a time by Steven Ross and Gerald Levin,

with Levin eventually becoming the sole CEO in December 1992.


The company then merged with Turner Broadcasting in a $7.5 billion
deal in September 1995, making Ted Turner its largest shareholder.
Shareholders did well during this time period, as shown in
Exhibit A. Part of this fine performance, however, was simply the
runup of the stock market in general, which carried with it many such
companies.
While Time Warner, or its various components, had a long history,
AOL had only gone public in March 1992 when it raised $66 million.
In 1999 it acquired Netscape, which was a major player in the Internet
industry as a result of its 1994 introduction of its Netscape Navigator
Web browser. Its contribution to AOL, however, was not what
was originally anticipated when the deal was announced.
STRATEGY BEHIND THE DEAL
AOL, being the worlds largest Internet service provider, had 34 million
customers. However, as of 2002, the number of subscribers was
down to 32.5 millionstill significant but indicative of the fact that
the business was losing ground to competitors. However, this was a
large audience to which many products could possibly be delivered
online. The architects of the deal saw the AOLTime Warner deal as
a marriage of content, that which Time Warner had, and distribution,
the contribution that AOL was supposed to provide. Time Warner had
long looked at the Internet as a major emerging market in the media
industry. It tried to enter part of this business on its own and invested
hundreds of millions of dollars in its failed attempt to do so. Its Full
Service Network, an interactive TV business, was a bust. From failures
such as this one, Time Warner management realized it could not be
successful going down the Internet road alone, but it believed that
this road was the path to the future. Time Warner looked to AOL to
take it down the Internet pathand it certainly got a ride for its
money.
When we look back at AOLs growth to becoming the leading
Internet service provider, we see that it did not face formidable competition
in its ascent to the number-one position in the industry. The
number of subscribers rose with the growth of PC sales and the proliferation
of the Microsoft Windows operating system. AOL went

from 1 million subscribers in 1994 to 10 million just three years later.


Although this growth is impressive, the performance of its two main
rivals, Compuserve and Prodigy, can hardly be considered impressive.
By 2000 AOL doubled its subscribers and had six times the number
of its number-two rivalEarthlink. As the technology became available,
the market rewarded the best of the main Internet service
providers, and AOL prevailed while Compuserve and Prodigy let
opportunities slip through their grasp and into AOLs waiting clutches.
Eventually, Microsoft, and to some extent cable companies, would step
into the market and provide more meaningful competition.
At the end of 1996, as part of its growth strategy, AOL switched
to a flat-rate pricing system, which provided unlimited usage for a
fixed fee. This was designed to spur growth, but it imposed major
capacity burdens on its undersized network. This lack of capacity created
annoyed customers, who looked elsewhere for Internet service.
Eventually, AOL would lose its appeal to more savvy computer users,
who would switch to Microsoft MSN or other Internet services providers.
AOL rapidly expanded its network and used $100 million in
cash from a deal with Telesave in 1997. The company also introduced
the Instant Messenger product, which was popular and helped fuel
growth while holding competitors partially at bay. At the same time,
AOL aggressively and successfully pursued advertising dollars, which
enhanced its cash flow. However, subscriber fees constituted 70% of
AOL revenues, with advertising providing an important but comparatively
minor share of revenues. At the same time, the market was
growing in a speculative boom that pushed up AOLs stock value. A
shrewd Steve Case now controlled valuable equity, which he would use
to engineer a valuable acquisition. His timing was perfect because
AOLs growth was showing signs of slowing, and its stock was greatly
overvalued. It was time to convert this lofty stock value into other,
non-Internet assets.
The Time Warner side of the business was a valuable combination
of various forms of media and entertainment. Among them were the
following business units:
Time, Inc. This unit was the worlds largest magazine publisher,
which traces its roots back to Henry Luce, who founded the
company in 1932. It featured more than 30 popular magazines,
including Time, Sports Illustrated, People, and Life. Although
magazine publishing is a competitive business that has been
attacked by nonmagazine forms of competition, this unit was
an industry leader.
Warner Music Group. Album sales have steadily been weakening.
However, Warner Music had a CD manufacturing unit that
could possibly be sold off for as much as $1 billion.
Warner Brothers movies. This Burbank, California, movie studio
business had marketed some major winners, including the Harry
Potter, Lord of the Rings, and Matrix series. On the other hand,
one risk factor was the great uncertainty caused by video piracy.
Time Warner Cable. While this unit was a major cable company,
it eventually fell way behind Comcast, which grew to more than
20 million subscribers while Time Warner had approximately
11 million. As AOLTime Warners post-deal troubles mounted,
some called for the spin-off of this business.
Turner Broadcasting. This business included the world-renowned

CNN as well as the TBS Network. However, rivals such as Fox


News had made inroads into CNNs market and were gaining
market share, while TBS was in need of further development.
HBO. This was still a major cable channel, with 30 million subscribers,
and it boasted an impressive track record, including
award-winning shows Sex and the City, The Sopranos, and Six
Feet Under.
The listed units within Time Warner featured many valuable
products. However, the company was not without its own problems.
Its debt level was high while some divisions, such as Warner Music,
faced an uncertain future.
With all of the valuable content in the various Time Warner units,
the question was whether the Internet would become a major distribution
arm for these various products. Could it enhance the normal
distribution channels through which these valuable Time Warner
products were already being marketed to the public? As we look back
on the deal years after the merger, we see that little meaningful
growth came from the Internet. The Time Warner units largely continued
to grow after the merger, but this growth was not meaningfully
enhanced by their association with AOL. The robust premerger talk
of synergies had always been vague and nonspecific. The deal makers
went full speed ahead to complete one of the largest mergers in history
without having a clear vision of how the synergies were going to
be exploited. So many well-paid senior managers worked on this deal
and yet none of them was able to formulate a strategy that specifically
articulated how the combination of the two companies would
produce any synergies. The whole strategy was vague at best, and this
was its undoing. The fact that the marriage also presented a major
culture clash was but one additional flaw that stood a distant second
to the flawed strategy.
Another potential source of synergy between the two companies
was Time Warners ownership of broadband cable lines. While AOL
had many subscribers on dial-up lines, it worried about its access to
high-speed broadband cable connections. Time Warner could conceivably
provide content to AOL but also help with AOLs own distribution.
Finally, the deal proponents alleged that the combination
could realize up to $1 billion in the usual premerger proposed cost
savings derived from reducing administrative overhead and other
sources. Never discussed was the possibility of record losses that would
be recorded.
PERFORMANCE OF THE POSTMERGER
AOL TIME WARNER
Almost right from the beginning of the marriage, and not unlike the
DaimlerChrysler deal, the merger soured. AOLs performance was
poor and got worse, pulling down Time Warner with it, to the chagrin
of former Time Warner, now AOL Time Warner, shareholders.
The collapse of the companys stock price is shown in Exhibit B.
POSTMERGER CULTURE CLASH
In addition to various other problems, the marriage of AOL and
Time Warner was a major culture clash. AOL being the dominant
company in the merger had managers at the senior levels headed
by Case, while Time Warner was led by Levin, Robert Pittman, and
Richard Parsons. After the merger, Case was chairman while Levin
was CEO. Parsons had a laidback style and would prove to be the

long-term survivor of the whole group, as the board eventually looked

to him to take over the entire company as it fell on bad times. AOL
was a loose culture in which its managers had a fly by the seat of
your pants management style. It was a relatively new company in a
rapidly growing high-tech industry that made long-term strategy planning
difficult at best. Time Warners culture was much more structured
and conservative. It did not respond well to being thrust together with
AOLs unconventional and brash executives. When AOLs performance
faltered, Time Warner management rebelled and refused to accept
a subordinate position to AOL, which they felt was pulling down
the whole company. The rebellion was also spurred on by the news
of accounting irregularities at AOL, which was accused of improperly
booking $190 million in revenue.
Over time Levin grated on Case and major shareholder Ted
Turner, and both wanted Levin ousted. 3 Levin was reported to have
failed to show sufficient respect for Case. When the combined company
suffered, Levin, its CEO, received much blame for the debacle.
Having alienated Case and Turner, whose wealth had suffered
greatly during Levins reign at the combined company, Levin found
himself on the chopping block.
LESSONS FROM THE AOL TIME WARNER DEAL
The strategy and how its proposed synergies were going to be
exploited needed to be clearly set forth. This deal had a strategy that
was vague at best and more accurately was confused and nonexistent.
Levin and his colleagues wanted to exploit the Internet distribution
channel of AOL but did not really know how they were going to do
it. What benefits would this strategy bring, and how valuable would
it be? This was a huge question that they never came close to answering.
How can Time Warners board say that they were satisfied with
the answers they got to this all-important question?
The overriding lesson we can take from this deal is that the strategy
should be clear. Synergistic gains are difficult enough to realize
when we think we see the path to their realization clearly. The future
is always uncertain, and it can place many unforeseen obstacles in the
pursuit of corporate success. When we cannot even see the path, how
do we know if one exists, or even where it leads? If management does

not clearly delineate the path to the synergistic gains to the directors,
then it needs to hoist a red flag and send managers back to the drawing
room.