Back at the turn of the millennium, AOL purchased entertainment giant Time Warner for $164 billion. The deal was announced on January 10, 2000 and it employed a structure that brought the two original companies together and merged them into a newly created entity. Due to the larger market capitalization of AOL, its shareholders would end up owning 55% of the new organisation whilst Time Warner shareholders owned only 45%, meaning that in practice AOL had effectively acquired Time Warner even though Time Warner had far more assets and revenues.
The 2001 merger was described as ‘the biggest mistake in corporate history’, by Time Warner’s Chief Jeff Bewkes and here’s why:
A lot of people back then believed the merger to be an inspired move. At the time, dot-com businesses were the darlings of the stock markets and AOL led the pack as the ‘dominant’ force. Its sky-high stock market valuation made the young company more valuable in market cap terms than many blue chips and the then CEO Steve Case was already shopping around for acquisitions before the Time Warner opportunity came up.
At the other end, Time Warner had already tried but failed to establish an online presence before the merger. A clear solution lay in bringing the two entities together under a single umbrella organisation. The strategy was a compelling one for all involved and outside onlookers as well. Time Warner would now have a direct route to of tens of millions of new subscribers and AOL in turn would benefit from access to Time Warner’s cable infrastructure as well as its content – also adding its own layer of, ‘user friendly’ interfaces to top off the offering. The whole thing was generally seen as revolutionary.
The deal appeared to be a visionary move but merging the two cultures of the combined companies was fraught with problems from the off and whilst the executives involved did the required due diligence on the figures, the required due diligence on the two companies’ differing cultures was not executed with the same degree of efficiency. The reportedly aggressive and in the words of some, ‘arrogant,’ AOL people horrified the more sober and corporate Time Warner folk. The envisioned cooperation and synergy between the two entities failed to materialize as mutual disrespect came to sour their relationships.
To compound matters further, a few months after the deal was done, the dot com bubble burst and the economy slipped into a recession. As the advertising dollars evaporated, AOL was forced to take a goodwill write-off of almost $99 billion in 2002, at the time, the largest loss ever reported by a company.
AOL was also rapidly losing subscribers and resultant subscription revenues. This resulted in a total loss of value on AOL stock of about $200 billion.
The AOL-Time Warner deal ultimately teaches us that content is king, but you can’t overpay for it and succeed. AOL used its inflated stock price to pay more than $160 billion for a business that was generating just over $1 billion in earnings (AOL’s earnings were less). When it became apparent that AOL had overpaid, the company was forced to take a huge write down and the job cuts and belt tightening that followed forced the conglomerate to spin off AOL, Time Warner Cable and Time Inc.
The next time your boss tries to get you to work with a colleague you don’t like, cite the Time Warner-AOL merger as a reason why it might be better for the company if you had your own office to work in.