Introduction
At the turn of the century, a bona fide giant betted all its assets on a giant dream. The bona fide giant was Time Warner Inc., a giant media conglomerate formed through the merger of several powerful media companies. The dream was American Online Inc. (AOL), a relative novice compared Time Warner Inc. in almost all aspects except potential and market capitalization. Since AOL was an internet service provider and the year 2000 was at the height of the dot com boom, everyone imagined that AOL was the way of the future hence the massive market capitalization (McGrath, 2015). Unfortunately, the merger, which was arguably the greatest deal in American corporate history would also become the greatest corporate disaster in American history up until the year 2008 when the great recession commenced. The primary reason why the merger happened, the hope of an internet dominated TV future was among the reasons why the merger failed, coupled by the fact that the two companies were so structurally different that they never really merged into one.
How the Merger Happened and Financial Analysis
The Times Warner AOL merger was akin to an acquisition since in essence, the latter was acquiring the former for a fixed dollar amount. AOL was to pay US$180 billion in exchange for the ownership of Times Warner (Johnson, 2000). Since both were publicly traded companies, a formula had to be arrived at regarding the stake of the past shareholders in the new company. As indicated above, AOL had a larger market capitalization but it was in any most accounts a miniature company with limited assists but with many subscribers. On the other hand, Time Warner was a massive conglomerate whose subsidiaries such as CNN and HBO owned massive actual assets and were making actual profits (McGrath, 2015). A compromise was arrived at to enable the public shareholders of the two companies to acquiesce to the merger. A new company dubbed AOL Time Warner Inc. would be formed. The new company had a share capital of 350 million dollars with AOL owning 55% while Time Warner owned 45%, despite the fact that AOL was bringing in 30% of the profit-stream against Times Warner’s 70% (Johnson, 2000). Each AOL shareholder would receive an equal number in AOL Time Warner Inc. as they had in AOL. However, because of the accrual asset based on Time Warner Inc. each of its shareholders would get 1.5 shares of the new company for each of the former company shares they held (Johnson, 2000). The AOL then took over the leadership of the conglomerate but most of the leadership of the subsidiaries remained as it was before.
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Why the Merger Happened
The primary reason why the merger happened was that in 2000, almost everyone believed that the internet was the imminent future of TV. It was for the same reason the novice AOL had a larger market capitalization than Times Warner Inc. The internet may have been the future of TV but to the extent that the said future was believed to be imminent was quite wrong as the dot-com bust came soon after (McGrath, 2015). 18 years later today, fully internet TV players such as Netflix and YouTube TV are still getting stiff competition from traditional cable TV companies. The year 2000 seems to be very long ago and perhaps ancient history when it comes to information technology. After all, there were no smartphone, tablets, iOS or Android . However, the belief on the prowess on the internet was so strong that at the end of the year 1999, there was a genuine global fear of economic and social collapse due to a millennia bug (CNN Money, 1999). This strong belief in the power of the internet and the control of the internet into the future drove the Times Warner to merge with AOL.
Strengths and Weaknesses
The primary strength of the merger lay in what each of the two companies brought into the transaction while the main disadvantage lies both in the incompatibility of the companies and their inability to follow the de jure merger with a de facto one. With regard to strength, Times Warner had a massive collection of media companies producing world-class content and also 13 million loyal customers. Conversely, AOL was a massive internet and internet content provider with 20 million subscribers. As a leading media commentator put it: “ Together, they represent an unprecedented powerhouse ”(Johnson, 2000). The primary weakness was that the two companies were exponentially different with AOL being a singular company with a singular objective while the other, Time Warner was a motley collection of exponentially different companies, with different objectives and brought together by a collection of several different mergers (McGrath, 2015). The merger only increased more ingredients to the motley collection of companies so convoluted to ever become one.
Opinion on the Merger and Conclusion
The merger of AOL and Times Warner may not be the biggest mistake in the history of corporate America but it was clearly a monument error based on presupposition, assumptions, and fear. By the late 1990s, it was clear that the future of communication and media was the internet. There was even a fear that books, radios, TVs, and newspapers would come to an end with computers and the internet taking over everything. AOL was buoyed by this belief into thinking it was greater than the giant Times Warner. Further, due to the internet boom, AOL had the money to act on that belief. Conversely, Times Warner was also driven by the belief in the power of the internet hence assumed that being taken over by an internet company would revolutionize the company. Two mutual mistakes combined to create an impossible corporation that would soon collapse. The merger should in the very least have waited another 10 years.
References
CNN Money. (1999). Few Y2K problems reported. Retrieved from https://money.cnn.com/1999/12/31/worldbiz/y2k/
Johnson, T. (2000). AOL and Time Warner to merge. Retrieved from https://money.cnn.com/2000/01/10/deals/aol_warner/
McGrath, R. G. (2015). 15 years later, lessons from the failed AOL-Time Warner merger. Retrieved from http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/
