Corporate Governance and the Failed Marriage of AOL and Time Warner
"The mating ritual began in September 1999 in the most romantic of cities, Paris" (p.88): Steve Case, an AOL-TW merger in mind, starts approaching Jerry Levin. On January 9, 2000, "it was done." (p.99). May 2002, newly appointed AOL-Time Warner CEO Parsons announced "a repudiation of the basic raison d'etre of the merger itself" (p.284).
Why did the AOL-Time Warner merger take place? What's your evaluation of the process through which it was decided upon? And the terms agreed upon?
Bella gerant alii, tu felix Austria nube!' - Let others wage war, you, happy Austria, marry!" There are many ways to build an empire, and love is almost always better than war. So, when two corporate giants agreed to march down the aisle together, Wall Street - and the world - eagerly awaited the blessed event, the more so as they hoped it would be a most bountiful union. Back in September 1999, no couple seemed better matched to take advantage of the Internet's endless opportunities for profit and expansion. It was the height of the dot com boom, small start-ups were popping up everywhere, and everyone was making money... And more money. America Online led the field in the brave new world of cyberspace. Just like its name implied, AOL was the provider of choice for the millions of Americans who were going online each day. And their numbers were growing fast - no other new invention had so completely captured the public imagination in so short a time. Time Warner too, was enjoying its days in the sun. The heir to a long line of mergers and acquisitions, the conglomerate had its hand in almost every aspect of the modern media - publishing, films, television - all except one, and AOL would bring that along with the wedding gifts. The hope was, on that day in Paris when the merger was agreed to, that a single communications giant would emerge; trump its rivals, and dominate the new world of the Information Age. On January 9, 2000, the happy couple exchanged their vows, and a new experiment in corporate conquest was born at the same time as a new millennium...well almost.
The goal of AOL's acquisition of Time Warner was to marry technology with content. "Technology companies have had a go at making content in the past," according to the Economist, "and found it surprisingly difficult.... Creative stuff, it turns out, is tough to create."
Access to specialized technologies and specialized talent that may be required to meet market demands; access to global markets that might be too costly or too risky to penetrate from scratch; the expansion of product or service offerings: any or all of these goals can be achieved through acquisition -- at least in theory.
AOL, which already dominated the American Internet market, and was still expanding, hoped to tap into the full potential of the Web by providing its customers with a complete package: shopping, news, information, music, TV and film schedules and reviews, and so and on. Time Warner, a giant in publishing, film, and television, would provide its resources and expertise in the area of content. Even better, Time Warner's experience in giving the public what it wanted to read and see covered a wide variety of fields and tastes. For generations, Time magazine had been one of the most respected news magazines in the business. Time also ran Time Life, home of the pop culture icon Life Magazine, and also of a numerous series of very mildly informative but profusely illustrated collections on history, science, culture, etc. The Warner half of the company had its start in Hollywood's golden days as Warner Brothers. While it had made many all-time classics, it also continued to be a major player in the contemporary film marketplace. And, as if that wasn't enough, there was always its television network: The WB, a newcomer to the scene that had already staked out a niche market in ethnic and low brow programming.
Put all these things together, and AOL Time Warner seemed a marriage made in Heaven. According to the agreement that went into effect on January 9, 2000, AOL shareholders took a fifty-five percent stake in the new company headquartered in New York. The deal was closed for a grand total of $183.8 Billion - the largest in corporate history. Most of this would come out of AOL stock - 166 billion dollars' worth, while AOL would borrow the remaining$17.8 Billion. AOL founder, Steve Case, would assume the headship of the new Internet/media mega-corporation. Slow grower, Time Warner would ride on a wave Internet success, and AOL would storm the wide-open spaces of New Media content.
2. "Jerry Levin and his crew had seen this movie before: Two sides come together, get hitched, hate each other, and live unhappily ever after. The name of that movie: the merger of Time Inc. And Warner Communications" (p.230). But "the differences between Time and Warner were not as lethal as the differences between Time Warner and AOL" (p.233). And "all the he [Haig, AOL Board member] could think was Jesus, let's hope they can make something out of this zoo" (p.242).
What cultural differences could have been dealt with, and how could they have been dealt with, during both the merger-planning and the merger-execution phases? What alternative corporate governance structures or processes could have allowed the two corporations to manage the integration more effectively?
Unfortunately, the luckless couple was plagued with problems from the start. They came from two different worlds - Time Warner was conservative and even a little bit old fashioned, one of the grande dames of the publishing and entertainment industries; while AOL was the new kid on the block, an upstart like its founder, and all the other overnight millionaires and billionaires who'd made their money on and with the Net.
The usual culture-clash story line of the merged companies features the upstart AOL and the stodgy Time Inc. trying to force square pegs into round holes. AOL is streamlined and of the moment, while Time Inc. is composed of individual fiefdoms united by their dedication to tradition. (An old Time Inc. joke: "How many Time employees does it take to change a light bulb?" Answer: "One hundred. One to change the bulb, and ninety-nine to say how much better they used to change light bulbs.")
Though perhaps a bit exaggerated, the above joke does illustrate the pitfalls of attempting to merge two widely differing corporate cultures. A young and vigorous company with essentially one product was casting itself in the role of (to return to our imperial analogy) the bold, yet somewhat barbaric, conqueror who overwhelms his more civilized neighbors because he is superior in only one respect. His weaponry may be more advanced, but he now finds himself presiding over an ethnic stew of conflicting traditions, and time-honored rituals. AOL should have taken care to respect the ways of its older half, and not tried to quickly to force the "old girl" into the Information Age. By the same token, Time Warner executives should have looked more closely at what they were getting themselves into. Inspired by Nineties greed, and dreams of "bigger is better," they forgot to check their Excel worksheets (or maybe they still kept ledgers by hand?) - they were the more profitable half of the new company. At the time of the merger, Time Warner's sales were $14.6 Billion to AOL's $4.8 Billion. True, AOL was worth more on Wall Street, its stock valued at $164 Billion, while Time Warner's total market value was far behind at $94 Billion, but things tend to change quickly in the Stock Market, particularly when the value of a corporation's stock doesn't quite match that corporation's assets. By 2001, it was clear that AOL was a classic example of what has come to be called the Internet Bubble. In the first quarter of 2001, AOL's share of the empire's earnings accounted for only 32.2%, yet it was still determined to push through changes that went against the usual practices at Time Warner.
Employee compensation is one manifestation of a shifting corporate mindset. The venerated Time Inc. profit-sharing plan has been eliminated in favor of less dependable stock-based compensation, a far less certain proposition than the good old days. "Almost every year I was there we had almost ten percent of our base salaries put away, and boy, that money certainly could compound," Marshall Loeb remembers. "It's hard to beat profit sharing for creating a comfortable retirement for your long-term employees." AOL has a different approach. At its "campus" in Dulles, Virginia, "you can find a whole bunch of employees making $40,000 a year, but they are millionaires because of their stock options," says Steve Lovelady. "For those people it worked. But a company can't have that kind of growth two decades in a row. It's…