The AOL/Time Warner Merger

The AOL/Time Warner Merger Where Traditional Media Met New Media Kamal Kishore Verma

Executive Summary The merger of AOL and Time Warner has been judged to be a merger between two companies in fear. AOL feared that its business model needed continual adaptation to a changing internet and wanted to ensure broadband access. AOL needed to continue its growth by acquisition strategy in order to justify its high market capitalization. Time Warner feared that its outdated network of traditional media outlets (television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift. Time Warner believed that for it to remain competitive it needed an immediate injection into the internet. But mergers out of fear are rarely successful. The valuation that analysts predicted (above $90 per share) never persisted as the two companies have not been able to fully integrate. AOL and Time Warner have not been able to formulate a strategy which can help the combined company move forward, the managers have failed to win the support of all divisions, and the dynamics and technologies of the internet have changed and have left AOL behind.

Time Warner History The history of Time Warner traces back to Warner Brothers. According to the popular legend, four brothers convinced their father to sell his golden wristwatch and to buy one of the first cinematographs (Edison-cinetoscope). With this cinematograph, the four brothers went from town to town showing films to the rural population. Later, they produced their own films. Warner Brothers has been formally registered in 1923 in Hollywood. In 1925, Warner brothers went public and in 1930 they launched their popular cartoon series. The Looney Tunes, such as Bugs Bunny and Daffy Duck were central figures and shaped the companys image in the public. Warner Brothers made a number of well-known classic films, such as Casablanca and a number of Hitchcock thrillers. Warner Brothers also began to acquire many record labels. In 1989, Warner Brothers merged with the publishing house Time to Time Warner. Time acquired Warner for about US$14 Billion and transformed it into a multi-media company consisting of record labels, motion picture as well as television production and distribution, studio facilities and film libraries, television networks, book and magazine publishing. In order to increase its product portfolio Time Warner acquired Turner Broadcasting System in 1996 and hence became the second largest cable television network. Its printing arm could secure more than 20% of all expenses for print advertisement in 2000 in the US, which makes it the dominant player. The history of the company shows that Time, Warner, and Turner Broadcasting grew through acquisition strategies (Exhibit 1: Time Warner History).

Market Situation Prior Merger In 2000 it was believed that future media growth motor would be the from the new media sector. Traditional and new media channels were rapidly converging into common media platforms. The industry believed that companies operating in one media channel only, either the traditional or the new media could not play a significant role in the future or, even worse, would vanish. Successful companies will harness the Internets nearly infinite customer reach and provide high-quality media contents, such as entertainment and information to its worldwide customers. The companied merged in January 2000, before the bursting of the over-valuations of internet companies. Therefore, from a standpoint of Time Warner at that time, the high expectations to regain growth momentum from a leading Internet player such as AOL seemed justified. Supernormal growth period growth rates were in hindsight over inflated, but followed the subscription growth of AOL and other online players (Exhibits 6-17). The later downward spiral of AOL Time Warners development reflects the loss in confidence of the market in the Internet and is somewhat symbolic for the burst of the Internet bubble. Exhibit 5 shows a steady increase in stock prices of AOL until 1999. It was only interrupted by a brief phase of decline in 1996, which coincides with the purchase of Turner Broadcasting Systems. In 1999, however, it began to remain steadily fluctuating around a mean value of about $60. This may indicate that the competitive advantage of AOL was not sustainable any more and may indicate the financial translation of the rationale behind the merger.

Reasons for the Merger For Warner, merging with an existing company was a more effective way to distribute its contents via online channels as opposed to building its own capabilities. Creating an own Internet branch would be both very costly and time intensive. The combination of Time Warners broadband systems, media contents and subscriber base would create significant synergies and strategic advantages with AOLs online brand, Internet infrastructure and own subscriber base of 30 million customers. The mostly untapped AOL subscriber base and the e-platform, which promises new service and revenue opportunities, and cross-marketing opportunities, will provide growth potential. The combination of two global players will further increase scale and scope of the new company thus strengthening its international position. As already mentioned, Time Warner intends to combine its media contents with the new distribution possibilities AOLs strong Internet presence provides. The high-quality contents in combination with interactive services available on the internet at any time the customer desires will result in increased benefits for consumers and translates into revenue growth.

AOL History AOL was founded in 1985 under the name Quantum Computer Systems, as a popular interactive services firm providing content and services to residential customers via dial-up modems. Originally, customers who subscribed to AOL were limited to AOL content and e-mail (as was typical of online service providers at the time). AOL was the first on-line service requiring the use of proprietary software, instead of a terminal standard program, resulting a graphical user interface well ahead of the competition (AOL was considered the online service for people unfamiliar with computers, in contrast to its main competitor CompuServe, who was oriented to the technical community). As the Internet grew in popularity, AOL also provided Internet access to the World Wide Web in addition to its proprietary content. In 1991 it changed it name to America Online Inc. The simple intuitive interface and an aggressive marketing led the company to extremely rapid growth in the late 1990s, fueled by a large number of acquisitions and geographical expansion. AOL aggressively pursued an acquisition strategy to increase its online presence and desire to provide members with original, interactive, and needed content (Exhibit 2).

Market Situation Prior Merger At the time of the merger, AOL had 27 million subscribers, amounting to about 40% of total US online subscribers. AOL grew in just eight years from a small Internet start-up, competing with the likes of Prodigy and the commented CompuServe (which was acquired in 1998), into a media conglomerate. On the way, the drivers of its profitability and growth have shifted from subscriptions and usage time to advertising and e-commerce deals. Despite the change in its strategy, one of AOL's features has been its pursuit to make ensure that investors understand its business model. Since 1996, when it began its transformation from computer-networking company to media giant, AOL made changes in its strategic direction to the investment community, even when doing so might have seemed perverse or damaging. The market registered with strong approval. AOL's stock price increased 1,468% from October 1996 to January 2001, compared with a 100% increase in the S&P 500, which AOL joined in December 1998.

Reasons for Merger The reason for the merger was allow each of the companies to get a piece of the Internet future which each of the companies could not provide for individually. For AOL, the merger was about technology: America Online was the dominant leader in what might be termed the sort of first stage of Internet usage, that is, people was going on-line for e-mail and Web surfing. But AOL did not have a strategy for the next generation of internet users who would require broadband access (where access to the Internet would be much faster and would allow users the ability to complete much more complicated tasks like media downloading, telephony, gaming, virtual offices, etc): On the surface, what happened Monday is simple: AOL, the leading provider of dialup Internet service, needed a strategy for moving its customers forward into the much-ballyhooed world of high-speed "broadband" access, controlled by telephone companies and cable TV operators (such as Time Warner). Time Warner, the ungainly media conglomerate, needed a credible way to salvage its Internet strategy after a decade of failure in the digital realm -- from the colossal flop of its "Full Service Network" interactive television experiment to the spectacular flameout of its misconceived Pathfinder Web portal. Put the two companies together and you get something like Monday morning's press conference announcing the deal: A torrent of references to "synergy," "one plus one equals three," "the media value chain," "the convergence of media, entertainment and communications," and "new benefits to consumers." You also get an avalanche of hype: One analyst declared, "It is probably the most significant development in the Internet business world to date."1 For AOLs Board of Directors, the portfolio of brands created with the merger of the two companies would cover the full spectrum of media entertainment and information, and this would led the company increase the revenues at the three major areas that had AOL: subscriptions, advertising and e-commerce and content. They believed that Time Warners cable systems would expand the broadband delivery systems for AOL computer services technology and, over all, they assured that the new business would be benefited from huge operating synergies (cross-promotion, more efficiency in marketing, cost reductions in launching and operating new technologies) as well as major new business opportunities. AOLs subscriber base and advertising revenues were growing exponentially until the crash of 2000 occurred. AOL suffered increasing demand from Wall Street to generate big advertising deals to meet rising expectations. When this failed, AOL resorted to unconventional methods to boost its financial numbers (utilizing legal action for an ad deal, booking E-Bay ad revenues as their own). AOL stock was severely overvalued and this merger was the only way to prevent a collapse in valuation. AOL, as the new corporate giant created by the Internet boom, was using its sky-high value of its stock to acquire an older Fortune 500 company. AOL's high market capitalization relative to that of Time Warner made the acquisition possible.

Proposed Synergies When AOL and Time Warner announced their merger in 2000 they had a clear vision of their synergies. AOL believed that the combined companies had the means to be uniquely positioned in order to bring interactive media into customers everyday lives and to further penetrate this market. The merger will combine Time Warner's vast array of world-class media, entertainment and news brands and its technologically advanced broadband delivery systems with America Online's extensive Internet franchises, technology and infrastructure, including the world's premier consumer online brands, the largest community in cyberspace, and unmatched e-commerce capabilities. AOL Time Warner's unparalleled resources of creative and journalistic talent, technology assets and expertise, and management experience will enable the new company to dramatically enhance consumers' access to the broadest selection of high-quality content and interactive services. By merging the world's leading Internet and media companies, AOL Time Warner will be uniquely positioned to speed the development of the interactive medium and the growth of all its businesses. The new company will provide an important new broadband distribution platform for America Online's interactive services and drive subscriber growth through cross-marketing with Time Warner's pre-eminent brands.2AOL at that time was believed to have the necessary experience to help Time Warner transform their divisions to the digital channels. Additionally Time Warner was believed to help AOL build next generation broadband. Together with Time Warner, AOL believed they could build a set of brands customers trusted in. Additionally, AOL Time Warner thought of building up facilities beyond just personal computers but also involving wireless devices, television, phones or PDAs. With the help of Time Warner AOL thought it could deliver any kind of content at any time to any place (AOL Anywhere). As most likely synergies of the merger the board of AOL regarded cost reductions and opportunities of growth. Revenue opportunities were seen in areas such as advertising, growth opportunities were seen in increased numbers of cross-promotion and marketing for Time Warners content through the channels of AOL. Efficiency increases were seen in marketing across different platform and distribution systems, cost synergies were likely to arise due to shared business functions (i.e. R&D and cost efficiencies because of launching interactive extensions of Time Warner Brands). Time Warner, in general, believed that through the integration of traditional and new media and communication and business technology the new company would be uniquely positioned in order to have a strong basis and take full advantage of the digital revolution. From Time Warners view this strategic advantage emerged from multiple brands, vast array of content, extensive infrastructure and strong distribution capabilities and that therefore the value of AOL Time Warner combined will be higher than the value of the single companies. Time Warner regarded AOLs extensive Internet infrastructure as a new distribution medium for its brands and content. Also Time Warner believed its broadband system was an ideal distribution platform for AOLs interactive services. Furthermore, AOLs e-commerce system was regarded to be an opportunity to promote Time Warners music labels. Linking Time Warners established brands with AOLs interactive services promised opportunities for subscriber growth. Finally, the Time Warner board thought that through the merger the international position of the brand would be strengthened as well as the benefit for consumers increased.3

Proposed Valuation The hype surrounding the AOL and Time Warner merger was fueled by and in turn helped to refuel the growing internet bubble. Wall Street analysts, internet gurus, and media moguls all hoped that this newly formed company would successfully integrate traditional forms of media with the new. A valuation of these two companies was complicated and unprecedented. This was the largest corporate merger to date and no one knew for certain what types of synergies and growth rates would be possible for the two companies. Under the assumptions of a 25% supernormal growth rate and a 5% terminal period growth rate the valuation of the company was over $93 per share (Exhibits 7, 8, and 17). While these growth rates were reasonable in the context of the environment of the late 1990s their sustainability was never questioned. Many questions remained unanswered. Could AOL continue to grow subscriptions and advertising revenues? Could AOL take advantage of Time Warners extensive cable network (if so what would this cost and how long before it materialized)? Could two large behemoths merge together? Was it AOL saving Time Warner or vice versa? The sensitivity tables attempts to answer some of these questions with technical analysis and try to judge their impact upon the share price of the newly formed firm (Exhibits 7-17). It is clear that the growth assumed in 2000 never occurred. A more realistic supernormal growth rate for the two companies would have judged their synergies to deliver 5-7% growth for the short term.

Reasons for Failure Viewing back upon the merger several reasons can be found why the merger did not work out as the former managements had hoped it would. One of the main reasons is that AOL basically never was an equal counterpart to Time Warner. At the time of the merger AOLs stocks were overvalued mainly due to the Internet bubble4. During the 1990 many upcoming Internet start-ups, the so-called dotcoms, were tremendously overvalued and to some extent without ever having made profit worth as much as established blue-chip companies because investors believed in their potential. Indeed only a few companies survived the new economy-era and are now established companies (e.g. Amazon or EBay). Since, however, AOL according to its stock price was worth as much as Time Warner at the time of the merger they got the same voting rights and power. There still exists much controversy around Cases profit taking from the sale of his shares (Exhibit 4): The fact that Case sold a major part of his AOL stock soon after the merger was announced in January 2000 (when the price of the stock was high) and made an estimated profit of $ 160 million evoked suspicion and anger among shareholders. They thought that Case was aware of the fate of the merger and accused him of making money, when the time was right, at the expense of the shareholders.5Yet, today AOL is certainly less worth than Time Warner. So, from todays perspective AOL received a too high price for its share or Time Warner paid too much for what it received in return. The stock price of AOL Time Warner fell from its peak of almost 90 US$ in 2001 down to almost 10 US$ in 2003 and right now is just at 13 US$. Also, since AOL turned out to be an unequal partner AOL Time Warner changed its name back to just Time Warner in the mean time and almost the whole AOL board has been replaced while still many of Time Warners directors are in charge6. Another reason why the merger failed is that in the time after the merger AOL and Time Warner failed to implement their visions and communicate them e.g. marketing Time Warner content through all channels possible. Additionally, they even lacked the ability to recognize new trends in the digital industry. One trend apart from broadband Internet was Internet telephony or Voice over IP (VoIP). AOL Time Warner as the main player in the digital revolution as they defined themselves hardly took notice of this trend and they failed to build a business model for that. Secondly, they were not able to promote their idea of a combined music-platform. Again, it was another company to gain the first mover advantage in this area (Apple with their introduction of the iTunes Music Store). And thirdly, one of the main trends AOL Time Warner missed in the recent years was the importance of highly personalized web services. Examples are MySpace.com, a platform for everyone to express oneself, which was bought by Rupert Murdochs News Corp. last year for about $580 million7 or Snapfish, a service that allows everyone to store pictures online and make them publicly available. AOL Time Warner in contrast believed that delivering serious news and facts was more promising than highly personalized content.8 A new thread came up for AOL in the recent years. AOL used to be the most important Internet Service Provider in many countries. However, they failed to offer broadband access as soon as possible. So it was the local phone companies to have the first mover advantage9. As a consequence of this not only lost AOL subscribers to their Internet service but also their portal lost importance leading to a loss in opportunity to promote AOL Time Warner content10. As a further consequence income from advertising is decreasing.11 Furthermore, the CEOs at the time of the merger, Mr. Case and Mr. Levin, still today regard themselves as being the wrong persons for having done the job at that time. In an interview Case states that not only him but also the whole board of directors in each of the companies really believed in the success of his idea; yet he admits that he was the one to blame for the failure since it was his idea. Indeed at that time AOL needed Time Warners broadband and cable business as a strong partner for further growth12. In contrast, it is to question whether Time Warner really needed AOL or whether a strategic partnership wouldnt have been the better choice13. One major mistake seems to have been in the assumptions about the merger itself. Time Warner was thinking it was they to mainly benefit from the merger since they could access AOLs media channels and promote their content through it. AOL in contrast was the party that gained most through the merger because they were able to use Time Warners broadband cable network and extend their broadband business.14

A final reason for the failure is the fact that AOL and Time Warner were not able to encourage a climate within the companies to initiate the synergies that were proposed. As Peter S. Fader, a Wharton marketing professor, says it is impossible to manufacture synergies, oftentimes they are just nothing more than serendipities.15 A clear and concise strategy never emerged from the two companies: Wharton business and public policy professor Gerald Faulhaber has heard this spiel before. AOL is an enormous asset, but it has a management problem, says Faulhaber. AOL has the audience, but Time Warner has demonstrated that it doesn't know how to take advantage of it. There are plenty of unanswered questions about AOL, Faulhaber adds. For example, what does AOL have to become in the future? What can AOL create that's unique? How can it garner profits from its instant messaging dominance? How will it convince its customers to stick with AOL as broadband Internet access grows in popularity?16Even though there was hope for a complete integration of the companies and the ability of both companies to leverage the others strengths, this never materialized. The integration of services which was editorialized by many cartoonists (Exhibit 3) never occurred.

AOL Time WarnerOn January 10, 2002, American Online (AOL) and Time Warnerannounced the second largest merger in history. The initial valuationplaced on the deal was $166 billion. The deal merged theworlds largest Internet service provider, AOL, with Time Warner,one of the largest media companies featuring magazines, movies,cable networks, and music producers. Time Warner was a combinationof a prior merger between Time, Inc. and Warner Brothers. TheAOLTime Warner deal proved to be a disaster for its shareholders,especially Time Warner shareholders. At the time, AOL shares werehighly valued, thereby allowing those shareholders to receive 55% ofthe combined company, with Time Warner shareholders getting theremaining 45%. As bad as the stock of the combined company performedafter the merger, AOL shareholders were probably betteroff being combined with Time Warner because that unit continuedto perform well after the deal, whereas the AOL side suffered andpulled down the overall company. In light of this, we would expectthat AOL shareholders would have been worse off if they had nothad Time Warners performance to offset their losses.Therefore, it would seem that AOL could thank its chairman,Steve Case, for at least finding a good partner to merge with usingits overvalued stock. He negotiated an all-stock, no-collar deal withGerald Levin of Time Warner, who did this deal as his last hurrah.Time Warner shareholders probably wished he had retired earlierthan April 2002 when he finally stepped down from the failingmedia giant. Levin, who had a 30-year history with the company andits predecessors, had a good track record up to that point. He couldnot pass up this huge deal and eagerly accepted overvalued AOLstock for his company. Those same shareholders, however, cannot thankhim for managing the company well because its postmerger performancewas very bad.It was amazing that somewhere in the negotiation process Levindid not pause and consider that AOL stock was valued at 231 timescash flow!1 The deal was labeled a merger of equals, but as we haveseen with other deals given that same label, one party usually quicklybecomes the dominant entity. Levin and Time Warner wanted thecombined company to be split 50:50, while Case offered a 60:40 split.Levin compromised with a 55:45 deal,2 even though AOL added lessthan 20% of the total revenues and less than one-third of the combinedcompanys cash flows.At the onset of the deal, it was more of an acquisition of TimeWarner by AOL than a merger of equals. Time Warner managementreluctantly put up with this situation until AOL began pulling downthe combined company.PRIOR DEALS BY THE MERGER PARTNERSBefore the AOL deal, Time Warner was involved in some large mergersthat generally worked out well. The main one was the mergerbetween Time and Warner in 1989. This deal become a hotly contestedhostile battle as Paramount emerged with a counterbid andsought to transform the merger of equals into an auction. Paramountlost this argument in the Delaware courts and the deal went forward.Time Warner was run for a time by Steven Ross and Gerald Levin,

with Levin eventually becoming the sole CEO in December 1992.The company then merged with Turner Broadcasting in a $7.5 billiondeal in September 1995, making Ted Turner its largest shareholder.Shareholders did well during this time period, as shown inExhibit A. Part of this fine performance, however, was simply therunup of the stock market in general, which carried with it many suchcompanies.While Time Warner, or its various components, had a long history,AOL had only gone public in March 1992 when it raised $66 million.In 1999 it acquired Netscape, which was a major player in the Internetindustry as a result of its 1994 introduction of its Netscape NavigatorWeb browser. Its contribution to AOL, however, was not whatwas originally anticipated when the deal was announced.STRATEGY BEHIND THE DEALAOL, being the worlds largest Internet service provider, had 34 millioncustomers. However, as of 2002, the number of subscribers wasdown to 32.5 millionstill significant but indicative of the fact thatthe business was losing ground to competitors. However, this was alarge audience to which many products could possibly be deliveredonline. The architects of the deal saw the AOLTime Warner deal asa marriage of content, that which Time Warner had, and distribution,the contribution that AOL was supposed to provide. Time Warner hadlong looked at the Internet as a major emerging market in the mediaindustry. It tried to enter part of this business on its own and investedhundreds of millions of dollars in its failed attempt to do so. Its FullService Network, an interactive TV business, was a bust. From failuressuch as this one, Time Warner management realized it could not besuccessful going down the Internet road alone, but it believed thatthis road was the path to the future. Time Warner looked to AOL totake it down the Internet pathand it certainly got a ride for itsmoney.When we look back at AOLs growth to becoming the leadingInternet service provider, we see that it did not face formidable competitionin its ascent to the number-one position in the industry. Thenumber of subscribers rose with the growth of PC sales and the proliferationof the Microsoft Windows operating system. AOL wentfrom 1 million subscribers in 1994 to 10 million just three years later.Although this growth is impressive, the performance of its two mainrivals, Compuserve and Prodigy, can hardly be considered impressive.By 2000 AOL doubled its subscribers and had six times the numberof its number-two rivalEarthlink. As the technology became available,the market rewarded the best of the main Internet serviceproviders, and AOL prevailed while Compuserve and Prodigy letopportunities slip through their grasp and into AOLs waiting clutches.Eventually, Microsoft, and to some extent cable companies, would stepinto the market and provide more meaningful competition.At the end of 1996, as part of its growth strategy, AOL switchedto a flat-rate pricing system, which provided unlimited usage for afixed fee. This was designed to spur growth, but it imposed majorcapacity burdens on its undersized network. This lack of capacity createdannoyed customers, who looked elsewhere for Internet service.Eventually, AOL would lose its appeal to more savvy computer users,who would switch to Microsoft MSN or other Internet services providers.AOL rapidly expanded its network and used $100 million incash from a deal with Telesave in 1997. The company also introducedthe Instant Messenger product, which was popular and helped fuelgrowth while holding competitors partially at bay. At the same time,AOL aggressively and successfully pursued advertising dollars, whichenhanced its cash flow. However, subscriber fees constituted 70% ofAOL revenues, with advertising providing an important but comparativelyminor share of revenues. At the same time, the market wasgrowing in a speculative boom that pushed up AOLs stock value. Ashrewd Steve Case now controlled valuable equity, which he would useto engineer a valuable acquisition. His timing was perfect becauseAOLs growth was showing signs of slowing, and its stock was greatlyovervalued. It was time to convert this lofty stock value into other,non-Internet assets.The Time Warner side of the business was a valuable combinationof various forms of media and entertainment. Among them were thefollowing business units: Time, Inc. This unit was the worlds largest magazine publisher,which traces its roots back to Henry Luce, who founded thecompany in 1932. It featured more than 30 popular magazines,including Time, Sports Illustrated, People, and Life. Althoughmagazine publishing is a competitive business that has beenattacked by nonmagazine forms of competition, this unit wasan industry leader. Warner Music Group. Album sales have steadily been weakening.However, Warner Music had a CD manufacturing unit thatcould possibly be sold off for as much as $1 billion. Warner Brothers movies. This Burbank, California, movie studiobusiness had marketed some major winners, including the HarryPotter, Lord of the Rings, and Matrix series. On the other hand,one risk factor was the great uncertainty caused by video piracy. Time Warner Cable. While this unit was a major cable company,it eventually fell way behind Comcast, which grew to more than20 million subscribers while Time Warner had approximately11 million. As AOLTime Warners post-deal troubles mounted,some called for the spin-off of this business. Turner Broadcasting. This business included the world-renownedCNN as well as the TBS Network. However, rivals such as FoxNews had made inroads into CNNs market and were gainingmarket share, while TBS was in need of further development. HBO. This was still a major cable channel, with 30 million subscribers,and it boasted an impressive track record, includingaward-winning shows Sex and the City, The Sopranos, and SixFeet Under.The listed units within Time Warner featured many valuableproducts. However, the company was not without its own problems.Its debt level was high while some divisions, such as Warner Music,faced an uncertain future.With all of the valuable content in the various Time Warner units,the question was whether the Internet would become a major distributionarm for these various products. Could it enhance the normaldistribution channels through which these valuable Time Warnerproducts were already being marketed to the public? As we look backon the deal years after the merger, we see that little meaningfulgrowth came from the Internet. The Time Warner units largely continuedto grow after the merger, but this growth was not meaningfullyenhanced by their association with AOL. The robust premerger talkof synergies had always been vague and nonspecific. The deal makerswent full speed ahead to complete one of the largest mergers in historywithout having a clear vision of how the synergies were going tobe exploited. So many well-paid senior managers worked on this dealand yet none of them was able to formulate a strategy that specificallyarticulated how the combination of the two companies wouldproduce any synergies. The whole strategy was vague at best, and thiswas its undoing. The fact that the marriage also presented a majorculture clash was but one additional flaw that stood a distant secondto the flawed strategy.Another potential source of synergy between the two companieswas Time Warners ownership of broadband cable lines. While AOLhad many subscribers on dial-up lines, it worried about its access tohigh-speed broadband cable connections. Time Warner could conceivablyprovide content to AOL but also help with AOLs own distribution.Finally, the deal proponents alleged that the combinationcould realize up to $1 billion in the usual premerger proposed costsavings derived from reducing administrative overhead and othersources. Never discussed was the possibility of record losses that wouldbe recorded.PERFORMANCE OF THE POSTMERGERAOL TIME WARNERAlmost right from the beginning of the marriage, and not unlike theDaimlerChrysler deal, the merger soured. AOLs performance waspoor and got worse, pulling down Time Warner with it, to the chagrinof former Time Warner, now AOL Time Warner, shareholders.The collapse of the companys stock price is shown in Exhibit B.POSTMERGER CULTURE CLASHIn addition to various other problems, the marriage of AOL andTime Warner was a major culture clash. AOL being the dominantcompany in the merger had managers at the senior levels headedby Case, while Time Warner was led by Levin, Robert Pittman, andRichard Parsons. After the merger, Case was chairman while Levinwas CEO. Parsons had a laidback style and would prove to be thelong-term survivor of the whole group, as the board eventually looked

to him to take over the entire company as it fell on bad times. AOLwas a loose culture in which its managers had a fly by the seat ofyour pants management style. It was a relatively new company in arapidly growing high-tech industry that made long-term strategy planningdifficult at best. Time Warners culture was much more structuredand conservative. It did not respond well to being thrust together withAOLs unconventional and brash executives. When AOLs performancefaltered, Time Warner management rebelled and refused to accepta subordinate position to AOL, which they felt was pulling downthe whole company. The rebellion was also spurred on by the newsof accounting irregularities at AOL, which was accused of improperlybooking $190 million in revenue.Over time Levin grated on Case and major shareholder TedTurner, and both wanted Levin ousted.3 Levin was reported to havefailed to show sufficient respect for Case. When the combined companysuffered, Levin, its CEO, received much blame for the debacle.Having alienated Case and Turner, whose wealth had sufferedgreatly during Levins reign at the combined company, Levin foundhimself on the chopping block.LESSONS FROM THE AOL TIME WARNER DEALThe strategy and how its proposed synergies were going to beexploited needed to be clearly set forth. This deal had a strategy thatwas vague at best and more accurately was confused and nonexistent.Levin and his colleagues wanted to exploit the Internet distributionchannel of AOL but did not really know how they were going to doit. What benefits would this strategy bring, and how valuable wouldit be? This was a huge question that they never came close to answering.How can Time Warners board say that they were satisfied withthe answers they got to this all-important question?The overriding lesson we can take from this deal is that the strategyshould be clear. Synergistic gains are difficult enough to realizewhen we think we see the path to their realization clearly. The futureis always uncertain, and it can place many unforeseen obstacles in thepursuit of corporate success. When we cannot even see the path, howdo we know if one exists, or even where it leads? If management doesnot clearly delineate the path to the synergistic gains to the directors,then it needs to hoist a red flag and send managers back to the drawingroom.