Anatomy of a Disastrous Deal
January 22nd, 2010On the 10th anniversary of the AOL-Time Warner deal, The New York Times published a set of retrospective interviews with Jerry Levin, Steve Case, and various others who were party to the deal (see How the AOL and Time Warner Merger went So Wrong).
When the deal was announced on Jan. 10, 2000, Stephen M. Case, a co-founder of AOL, said, “This is a historic moment in which new media has truly come of age.” His counterpart at Time Warner, the philosopher chief executive Gerald M. Levin, who was fond of quoting the Bible and Camus, said the Internet had begun to “create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression.”
The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have been separated, is about one-seventh of their worth on the day of the merger.
To call the transaction the worst in history, as it is now taught in business schools, does not begin to tell the story of how some of the brightest minds in technology and media collaborated to produce a deal now regarded by many as a colossal mistake.
MY COMMENT: That sounds about right. We generally refer to it as among the worst deals of all time. In fact, in the years after the merger I used the AOL Time Warner case as my final exam. I asked students to evaluate the deal – from the partner selection to the pricing to the integration. Students generally agreed that there was some real complementarity between the businesses, wedding distribution and content. However, as I’ve stressed many times on this blog, pricing and integration matter a great deal (see Why M&A Deals Go Bad and Appreciation for the Complexity of Acquisitions). The AOL Time Warner merger was fraught with integration difficulties from the get go, and it was never able to recover.
Some snippets from the interviews:
MR. LEVIN We were emerging from not just old media but from an analog world into a digital world, and philosophically people were beginning to understand that the digital world was a transformational universe.
AUTHOR COMMENTARY The deal was sealed at a dinner in early January at Mr. Case’s house in McLean, Va. The transaction was spun to the world as a merger of equals, but in reality AOL, with its more valuable stock, was acquiring Time Warner. AOL would own 55 percent of the new company and Time Warner, 45 percent. But the new board would have an equal number of AOL and Time Warner directors. Mr. Levin would be chief executive, and Mr. Case would be chairman.
Over a weekend, the two sides conducted due diligence, with teams of lawyers camped out in two law offices in Manhattan.
MR. LOGAN Dumbest idea I had ever heard in my life.
MR. LEONSIS I was one of the loudest advocates for not doing the deal.
MR. BOGGS Just real regret and dread.
MY COMMENT: Now this is news. I had no idea that some of the top executives strongly opposed the deal. Hopefully their answers do not simply exhibit some form of self-serving bias or retrospective rationality.
Back to the Times story…
AUTHOR COMMENTARY The optimism surrounding the deal was brief. In May of 2000, the dot-com bubble began to burst and online advertising began to slow, making it difficult for AOL to meet the financial forecasts on which the deal was based. The world began moving quickly to high-speed Internet access, putting AOL’s ubiquitous dial-up service in jeopardy.
The companies had another problem: both sides seemed to hate one another.
MR. PARSONS I remember saying at a vital board meeting where we approved this [deal], that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different.
MR. BEWKES …The enduring debate is whether the deal collapsed because the concept was flawed at the start, or because the cultures were too different and the execution of the merger was a failure.
MR. CASE It was a good idea, but the execution of it wasn’t what it needed to be, and I accept responsibility for that.
MR. PARSONS The business model sort of collapsed under us, and then finally this cultural matter. As I said, it was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war.
My take: The strategic logic behind the deal was not terrible. Some aspects of it were even visionary. Unfortunately, the deal was a bit on the early side, during a period when the technology itself had not yet evolved to a point where the synergies were realizable. And oh yeah, the execution was horrendous too.
Interestingly, Comcast is making a similar play by acquiring NBC Universal. Time will tell whether Comcast can succeed where AOL Time Warner failed. The outcomes of the Comcast NBC Universal deal should provide insight into whether AOL Time Warner was simply early, or truly ill-advised.
Nevertheless, the Times article was definitely worth the read. I encourage you to read it in its entirety (How the AOL and Time Warner Merger went So Wrong). Interesting stuff!!
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