Aol Time Warner 2

AOL TIME WARNER
Instructor: Prof Ashutosh K Sinha,

141, Chintan, IIML
Phone 6618 (O)
Email: ashutosh@iiml.ac.in
Motives driving Mergers
Efficiency Theory Monopoly Theory
• Operational synergies • Mergers executed to
– Economies of scale achieve market power
– Vertical integration
– More efficient production or • Firms can cross subsidize
organizational technology-
knowledge transfers products in different
• Financial synergies markets
– Lower cost of capital- increase size,
lower risk, establish an internal • Limit competition in more
capital market than one market- footholds
– Access to unutilized tax shields
– Increase leverage opportunities
• Managerial synergies
– Bidder’s management team may
have superior planning/ monitoring
abilities
Motives driving Mergers
Valuation Theory Empire Building Theory (Agency)
• Mergers planned and executed • Managerialism
by managers who have better
information about target value – Managers undertake
than the stock market acquisitions to maximize their
– ‘sitting-on-a-goldmine’ own utility rather than
explanation shareholder value
– ‘kick-in-the-pants explanation’
– Unsuccessful mergers’ target • Free Cash Flow Hypothesis
value falls back to pre-offer level – Agency costs associated with
• Managerial hubris payout of free cash flow
– unrealistic belief by acquiring
firm managers that they can
manage assets of target firms
better
– ‘The Winner’s Curse’
Real Value of a Merger
General M&A Rules for Managers
Bidding Firm Target Firm
• Search for valuable & rare • Seek information from
economies of scale & scope
bidders
• Keep information away from
other bidders • Invite other bidders to join
• Keep information away from the bidding competition
target
• Avoid winning bidding wars/ • Delay, but do not stop the
multiple bidders acquisition
• Evaluate targets carefully;
close the deal quickly
• Operate in ‘thinly traded’
acquisition markets
7/14/2020 Prof Ashutosh Kumar Sinha, IIM Lucknow 5

“A Marriage from Hell”?
AOL Time Warner: Why did the Merger Fail?
• Ill conceived synergies
– The dot com bubble
– Advances in fast broadband technologies
• AOL's expensive and slow dial-up Internet access
– Investigation for fiddling with accounts
– Limitation of the synergy model
• Customers will not shut out competitors’ content, nor crassly favor their own
– Where Yahoo and Google make money on content with advertising, AOL
looked to make money with subscriber fees
• Poorly implemented
– constant squabbling over the terms of deals between the cable
company and the Internet service
– short-term thinking, bad technology, bungled product development,
and a risk-averse culture more prone to imitation than innovation
A Problem with Vision?
• AOL’s original vision
– “to build a global medium as central to people’s lives as the
telephone or television… and even more valuable”.
• The company accomplished this vision prior to the merger.
• Vision statement in 2006

– “to serve the world’s most engaged community”
– Nondescript and applicable to many businesses
Aftermath
• Spun out from Time Warner: Dec 09, 2009:
– Can’t figure out how to integrate the Internet company into its
operations
• AOL's prospects look dim

– aggregating and indexing media- Google
– chat, messaging and sharing of content with friends- Facebook and
Twitter
– Video- You Tube (also Google)
– Music- iTunes (iPod/ iPhone)
– Print- Tablet (Apple), Kindle (Amazon)
• Dec 06, 2010

– ‘Under the transaction reportedly being considered, AOL would sell its
dial-up business to another Internet service provider and combine its
content business with Yahoo, which publishes news and a widely used
network of maps.’
Aftermath…
• Dec 21, 2011 (Bloomberg)
– “AOL Chief Executive Officer Tim Armstrong has been struggling
to revive sales after the separation from Time Warner Inc. in
December 2009, as AOL competed for ad dollars with Google
Inc. and Facebook Inc. Revenue has dropped in four successive
quarters, and AOL has lost $792.2 million since the spinoff”
– “AOL Inc. (AOL), losing as much as $500 million annually in its
display advertising business, must take “immediate action” to
stem shareholders’ losses”
• Dec 24, 2013

– The Huffington Post (the cornerstone of AOL's media
aspirations, acquired in 2011) has yet to turn a profit for AOL,
falling far short of Armstrong's projection at the time of the
acquisition that the unit would post $66 million in operating
profit in 2013 on $165 million in revenue
• Mark May, an analyst with CitiGroup Research, forecast The Huffington Post
will post a loss of about $6 million this year on $100 million in revenue
Aftermath…
• May 12, 2015
– Verizon Communications has reached an agreement to acquire AOL
for $50 a share in a deal valued at about $4.4 billion. The
telecommunications giant said at the time the acquisition would
further its strategy to build out its LTE wireless video and streaming
video strategy.
– Verizon is trying to gain some type of foothold in the changing online
industry, as its traditional communications business slows down.
• a sophisticated suite of advertising technologies for online and traditional
media
• AOL’s platform is particularly strong in video advertising—which CommScore
says reaches more than 50% of the U.S. population.
• The Internet company’s successful digital platform will also coincidentally
assist Verizon’s plans to launch its own Internet TV service
• The acquisition was completed on June 23, 2015

Takeaways...
• Jeff Bewkes, Time Warner's chairman and CEO (2010)
– "The whole the idea was misguided in the first place. It was the
biggest mistake in corporate history.”
– Everyone needs to think carefully about what their function is in

the modern world and the value of the activity that you and
your company are doing.
– It is the legitimacy of any business enterprise that, in order to

deserve business and financial support, you should be doing
something valuable and legitimate and not something else."
...Takeaways
• Levin and Case’s observations (2010 onwards…)
– “Vision without execution is hallucination."
– “Leaders need to be compassionate and understanding of the

significant tension due to a merger’s disruptive nature and
cultural differences”
– “Vision is nothing without execution in which people are key”
– “There was too much focus on internal politics and Wall Street
instead of customer needs”
...Takeaways
• http://www.cnbc.com/id/15840232?play=1&video=1376466773
• http://www.cnbc.com/id/15840232?video=1376488035
• http://www.moneycontrol.com/video/special-videos/marriage-
from-hell-the-breakupaol-time-warner_437652.html
• https://www.cnbc.com/2018/06/13/steve-case-to-att-learn-
from-my-aol-time-warner-failures.html

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AOL TIME WARNER

Instructor: Prof Ashutosh K Sinha,

7/14/2020 Prof Ashutosh Kumar Sinha, IIM Lucknow 5

• The company accomplished this vision prior to the merger.

• Vision statement in 2006

• AOL's prospects look dim

• Dec 06, 2010

• Dec 24, 2013

• The acquisition was completed on June 23, 2015

– Everyone needs to think carefully about what their function is in

– It is the legitimacy of any business enterprise that, in order to

– “Vision without execution is hallucination."

– “Leaders need to be compassionate and understanding of the

– “Vision is nothing without execution in which people are key”

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