America Online and Time Warner Merger

Mergers and Acquisitions

America Online and Time Warner

1. The Deal

This text concerns itself with the merger between America Online (AOL) and Time Warner. As indicated, this was a merger. As Berk, DeMarzo, and Harfod (2022) point out, there are various kinds of mergers. The merger between America Online and Time Warner was a conglomerate merger. According to Berk, DeMarzo, and Harfod (2022), this type of merger takes place when the acquirer and target operate in different industries. Whereas America Online was in the internet services industry, Time Warner operated in the broadcasting and cable industry. The Federal Communications Commission – FCC (2018) points out that in this particular deal, “both AOL and Time Warner would become wholly owned subsidiaries of a newly formed holding company, AOL Time Warner.”

2. Structure of the Deal

The year 2000 merger between AOL and Time Warner happens to be one of the biggest and most significant mergers in history. According to Brigham and Daves (2021), the value of this particular deal was a record $350 billion. It is important to note that this was an all-stock deal. A stock swap, according to Berk, DeMarzo, and Harfod (2022), could be conceptualized as the arrangement whereby the payment for target shares happens to be stock (received by shareholders of the target). Thus, in essence, the currency of exchange in this particular merger was shares of stock. In the words of Brigham and Daves (2021), “Time Warner shareholders and AOL shareholders exchanged their shares for stock in the new company” (117). The merger between the two companies, as had been pointed out earlier in this text, resulted in the formation of AOL Time Warner.

3. Purpose and Goals of the Deal

This deal was largely rooted on the general consensus at the time that the models of mainstream media enterprises would likely be made obsolete by the Internet. Evidence of this general market consensus was the fact that at the time, despite its cash flows being less than half those of Time Warner, America Online traded at a price that was double that of Time Warner (Brigham and Daves, 2021). With America Online being a hugely successful portal to the internet and boasting of more than 30 million subscribers, the company was seen by many as an enterprise of the future. On the other hand Time Warner had interests in publishing, movies, as well as cable. Some of the Time Warner’s brands were the massively poplar Warner Bros., CNN, and Time magazine. Thus, at the time, the merger between the two companies was considered a masterstroke of sorts in as far as the establishment of a sustainable media model is concerned, i.e. as a consequence of the combined value of both companies’ capabilities.

Boone, Kurtz, and Berston (2019) best capture the overall aim of the merger with his assertion that those involved in the merger deal intended to bring together the unique capabilities of Time Warner (which were inclusive of, but not limited to; movie and television production, as well as magazine as well as book publishing) with the online service provision capabilities and huge subscriber base of AOL to create what could be considered an optimal media formation. However, as will be demonstrated in the subsequent sections of this text, the optimism surrounding this particular merger was short-lived.

4. Biggest Beneficiary of the Deal

It is important to note that in as far as the merger deal between America Online and Time Warner is concerned, there was no clear beneficiary. However, there was a clear loser from the onset. For instance, as Boone, Kurtz, and Berston (2019) indicate, it could be argued that Time Warner’s fortunes took a downturn less than two years after the merger following the 2001 internet bubble burst. More specifically, in the words of the authors, Jerry Levin, who had served as the CEO of Time Warner before the merger, was “widely blamed by shareholders for allowing Time Warner and its stable old-media assets to be effectively taken over and dragged down by the ailing new-media division” (Boone, Kurtz, and Berston, 2019, p. 227). As will be demonstrated elsewhere in this text, this could easily be considered one of the worst merger deals in history owing to the fact that today, neither AOL Time Warner, nor any of the two entities involved in the deal retains its status as a publicly traded company due to, amongst other things, spinoffs and subsequent acquisitions by other entities.

5. Downfalls/Damages Caused by the Deal

To begin with, it should be noted that the merger resulted in a clash of cultures. Each company had its own unique culture prior to the merger. From the onset, merging the two sets of cultures became rather difficult. An evaluation of available literature indicates that leading up to the merger, little to no due diligence was done on the concern of culture. Indeed, according to Boone, Kurtz, and Berston (2019), things could have perhaps been different “if questions of chemistry and culture were taken as seriously as the desire to form a new media giant” (239). For instance, the author points out that America Online people came across as rather arrogant and aggressive. On the other hand, Time Warner employees were more laid back and conservative. By some accounts, the Time Warner side was “horrified” by the more audacious and bold America Online workers and executive (Boone, Kurtz, and Bersto, 2019). To a large extent, this sowed the seeds of mutual disrespect going forward.

The deal also vaporized teamwork – which both companies had excelled in as individual entities. It became difficult for employees from both companies to work as a unified team in the new formation. The founding CEO of America Online, Steve Chase, who went on to become AOL Time Warner’s Chairman, attributes the inability of employees from both sides to work together to distrust and lack of a common vision (Feloni, 2018). For instance, according to Case, before the merger, America Online’s success had largely been attributed to the alignment of the team with the company vision (Feloni, 2018). In as far as mistrust is concerned, Case makes an observation to the effect that although he became AOL Time Warner’s chairman and Jerry Levin (who had been serving as head of Time Warner) became the Chief Executive Officer, there was a general feeling that he was the one who was really in charge or in control (Feloni, 2018). This, as he further indicates, resulted in unfounded suspicion on the part of Time Warner executives.

Also, as has been pointed out elsewhere in this text, the merger tanked Time Warner’s operational capabilities. Although feeling threatened by the internet revolution, Time Warner had been an otherwise stable enterprise. Following the bursting of the internet bubble and the financial impact it had on AOL Time Warner, as well as the implosion of America Online’s previously successful dial-up service, it increasingly became difficult to leverage Time Warner’s content.

6. Current Status of the Deal

Over the last two decades, the said merger has been unwound in various formats – essentially meaning that neither AOL Time Warner, nor any of the two entities involved in the deal retains its status as a publicly traded company. Some of the key events that have taken place over the said period of time are inclusive of, but they are not limited to: the spinning off of AOL by Time Warner in the year 2009; the acquisition of AOL by Verizon Communications in the year 2015; and the purchase of Time Warner by AT&T in the year 2018 (Grocer, 2018). Thus, in the long-run, the deal was unsuccessful.

7. Strategies for Growth and Sustenance

To a large extent, given that the merger between America Online and Time Warner has been unwound in various formats and the entities involved acquired by other companies, there is nothing that can be done at this point to salvage the situation – i.e. in as far as the product of the merger deal (AOL Time Warner) is concerned.

8. Acquisition by a Third Party

As has been indicated elsewhere in this text, the individual companies involved in this particular merger have been acquired by third parties following the unwinding of the merger. Time Warner was purchased by AT&T in the year 2018. The deal appears to have been motivated by the need for AT&T to diversify. AOL was acquired by Verizon Communications in 2015. The deal was attributed to the need by Verizon Communications to “build up its nascent business in video and advertising on mobile phones” (Boone, Kurtz, and Berston, 2019).

9. Recommendations and Suggestions

If the companies could ever do it again, I would advise that they better plan for cultural integration. This would largely involve recognizing the fact that both entities have their own ingrained cultures and set in motion plans to ensure that a clash of cultures does not take. More specifically, I would advise that from the onset, the companies set the cultural integration agenda and highlight the key differences in as far as shared values and beliefs are concerned. Ideally, this would be followed by a clear definition of an ideal culture for the new entity and the formulation of a culture change plan.

There is also need to clearly evaluate the rationale and reason for merger and how it could be impacted by the various kinds of risks or external events. Indeed, Dudley (President – Capital Assets Group) has been quoted saying, “one of the key reasons mergers and acquisitions fail is a poor understanding of the target business and the consequences of the transaction” (Boone, Kurtz, and Berston, 2019). In the case of the merger between America Online and Time Warner, the synergistic benefits of the merger were largely overstated.