Bigger Is Stronger? Case Study On The AOL Time Warner Merger

Bigger is stronger?
Case study on the AOL

Time Warner merger
Y6355808
Supervisor: Abigail Schoneboom
22nd September 2011
Dissertation submitted in part fulfilment of the degree of MSc in Management with

Business Finance
The York Management School

University of York
Bigger is better? Case study on the AOL Time Warner merger
Abstract
This dissertation aims to explore economic rationality of media mergers and

acquisitions, with an empirical focus on the AOL Time Warner merger. Adopting the
case study method, which provides in-depth analysis and detailed reasoning, fits with
the research objective and helps answer research questions in a more explanatory way.
Research data are mainly from organizational annual reports, news articles and related
academic literature. The paper takes a close look at corporate performance in finance,
human side and culture respectively in three stage of M&A (i.e. pre-merger,
integration and post- merger) and attempts to identify key factors (both macro- level
and micro- level factors) that contribute to media M&A failure through an applied
synthesis of prior research. In addition, a series of suggestions for more successful

M&A process are also presented in this dissertation. Finally, a comprehensive
conclusion is made that size is no guarantee of success and any business must identify
its own competitive advantage and meet the demands of customers consistently. After
all, media M&A are not always the solution to difficulties.
Key words: media, mergers and acquisitions, economic rationality
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Acknowledgement
I give my sincere gratitude to my supervisor Dr Abigail Schoneboom who despite her

tight schedule still helps me finish the dissertation. Many thanks for her patience and
kindness. This dissertation, for me, is not only a chance in academic improvement, but
also a reflection of organizational management practices, which is of high value to
guiding my future work.
My special thanks also go to all of the teaching staff at the York Management School,
from whom I learn a lot, both in academic knowledge and wisdom in life.
I would like to appreciate all the help and support from my parents, who are always
understanding, loving and supportive to me, no matter what difficulty I may come
across. I am also thankful to my friends who always encourage me to follow my heart
and fulfil myself.
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Contents
Abstract....................................................................................................................... 1
Acknowledgement ..................................................................................................... 2
Chapter 1 Introduction ............................................................................................ 5
1.1 Area of interest................................................................................................. 5
1.2 Research questions ........................................................................................... 7

1.3 Structure of dissertation .................................................................................. 7
Chapter 2 Literature Review ................................................................................... 9
2.1 The definition and classification of M&A ...................................................... 9
2.2 Motives for M&A ......................................................................................... 10
2.3 Industry-specific M&A analysis review ....................................................... 10

2.4 Reasons for media M&A .............................................................................. 11
2.5 Distinctive characteristics of media M&A ................................................... 12
2.5.1 Characteristics of media products ......................................................... 12
2.5.2 Value creation process of media products............................................. 13
2.6 Determining factors of successful M&A ...................................................... 14

2.7 Evaluation of media M&A............................................................................ 15
2.8 Summary ....................................................................................................... 17
Chapter 3 Methodology ........................................................................................ 19
3.1 Introduction ................................................................................................... 19
3.2 Underlying philosophy of social research..................................................... 20

3.3 The rationale for the selected methods ......................................................... 20
3.3.1 Why case study?.................................................................................... 20
3.3.2 A critical evaluation of case study ........................................................ 21
3.3.3 A critical evaluation of data collection ................................................. 23
3.4 Measurements of financial performance....................................................... 25

Chapter 4 Analysis of results ................................................................................ 26
4.1 An overview of the merging parties.............................................................. 26
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4.2 Pre-merger..................................................................................................... 27
4.3 The integration process ................................................................................. 29
4.4 Post-merger ................................................................................................... 31
4.4.1 Finance .................................................................................................. 31

4.4.2 Human resources................................................................................... 38
4.4.3 Culture................................................................................................... 38
4.5 Reasons for merger failure ............................................................................ 39
4.5.1 External factors ..................................................................................... 39
4.5.2 Internal factors ...................................................................................... 40

4.6 Recommendations for successful M&A ....................................................... 45
Chapter 5 Conclusions .......................................................................................... 47
Bibliography............................................................................................................. 50
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Chapter 1 Introduction
1.1 Area of interest
This paper aims to identify economic rationality of mergers and acquisitions in the
media industry by conducting an applied synthesis of existing literature. Generally
speaking, there are the following three factors which make this subject of practical
importance.
To start with, with the increasingly popular trend of media mergers and acquisitions,
scholars and practitioners are in need of more details and guidelines regarding media
M&A. The past two decades have witnessed the proliferated M&A in the media
industry. Mergers and acquisitions, as a popular tool for company growth and
expansion, are part of a strategic approach used by many firms to pursue stronger
performance. For instance, firms may take the opportunity of M&A to expand into
new markets, gain expertise or knowledge, or reallocate capital (Napier, 1989). When
it comes to the media industry, historically, media companies tended to be small and
medium sized enterprises in terms of revenues, assets and employment. It was not
until the 1970s and 1980s did a number of newspaper companies begin expanding and
become large firms. From that moment, economies of scale and scope had been
regarded as incentives to boost media growth. From their perspectives, large
companies might have easier access to more financing and content resources. It was
also the belief that the concept of media conglomerates equalled to continually
expanding, profitable and widely-present organizations (Picard, 2002).
Having been influenced by such beliefs, media companies begin a variety of attempts
to grow or survive, such as diversification, mergers and acquisitions, joint activities
and so on. Among these, M&A are viewed as the most dominant way for expansion
and growth for quick entry into new geographic markets or use of complementary
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products (Auerbach, 1988). There are signs that conglomerates are heading to seize
opportunities in investment and acquisition and many of them are in international
markets. In the media industry, the M&A fashion leads to the birth of two media
giants: AOL Time Warner and Vivendi Universal. The former is viewed as the largest
combination of new and traditional media, creating a value of $162 billion, whereas
the latter integrates complementary assets of Vivendi, Seagram and Canal+ and makes
a wide presence in different fields of media. Another media giant is News Corp., the
Australian company. Under the leadership of Rupert Murdoch, who succeeds in
translating his vision into workable actions, News Corp. grows into one of the largest
media conglomerates quickly with the help of numerous media mergers and
acquisitions.
Although media M&A have been a prevailing approach adopted by firms of different
sizes, there is no unanimous argument in terms of their economic rationality. For

example, prior academic results have been studied from multiple perspectives, such as
culture, human resource and strategic management. Similarly, various studies have
also explored different industry- focused content, like manufacturing, airline, banking,
service etc. In spite of this, few of them have synthesized various strands of research
on M&A in the media industry from the standpoint of economic rationality.
Finally, the failures in recent years experienced by large media firms provoke a heated
discussion of whether media M&A are the best solution to difficulties. In the year of
2002, these combined “media giants” collapsed. Both AOL Time Warner and Vivendi
Universal reported a huge loss, AOL Time Warner merger in particular, which was
promoted as the blend of old media and new media and turned out to be the worst
merger activity in American history. These facts raise the issue that whether media
M&A are the right choice to achieve growth and profitability in reality.
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1.2 Research questions
This article adopts a case-study method, based on the AOL Time Warner merger, to
conduct detailed analysis in terms of media M&A. The case of AOL Time Warner is
selected because of its unprecedented scale, power and impact. Case studies,
providing a thorough interpretation of a specific social setting, manage to concentrate
on in-depth analysis (Bryman, 2008), which fit with research objectives in this
dissertation. Generally speaking, the results are discussed from three aspects: finance,
human resources and culture, which provide a clear framework for research. The
following research questions are put forward:
(1) Does the combined company perform better after the merger than before?
(2) If not, what factors contribute to the media M&A failure?
(3) How can media companies avoid possible pitfalls during this process to achieve
success?
1.3 Structure of dissertation
The following chapter (Chapter 2) presents a comprehensive understanding of results

and findings in prior academic research in related areas, including basic concepts,
motives and success factors of mergers and acquisitions. Special attention is given to
a critical evaluation of media M&A, so as to gain deeper insight and facilitate further
analysis and synthesis.
After that, Chapter 3 gives an implication of underlying philosophy of social research

and the reason why case study method is selected and best for this dissertation. The
process of how data are sourced, collected and measured is included as well.
In Chapter 4, the case study of AOL Time Warner is conducted to judge economic
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rationality of media M&A with more detailed analysis and synthesis of prior research.
The whole process of merger is divided into three stages: pre-merger, integration and
post-merger. Assessment on performance in all of the three areas in finance, HR and
culture is made to suggest whether media M&A are economically rational in this case.
Relevant advice for better M&A process in the media industry is also given at the end
of this chapter.
Lastly, Chapter 5 offers a brief summary of all the findings of study in this dissertation.
It is also an opportunity to re-examine the whole framework and ensure the research
objectives are fulfilled.
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Chapter 2 Literature Review
2.1 The definition and classification of M&A
Merger means taking control of a target company through the purchase of stocks or
exchanges, whereas acquisition is the combination of several firms into one with the
possession of target firms’ assets (Wen, Wang and Wang, 2005).
According to Barney and Hesterly (2010), based on the characteristics of industries

and a firm’s operations, M&A deals can be classified into five types: vertical,
horizontal, product extension, market extension and conglomerate. A vertical merger
occurs when a firm integrates its suppliers or customers vertically, either forward or
backward, who are present in different stages of the production process. A horizontal
merger implies the acquisition with a former competitor. Product and market
extension mergers indicate that a firm enters complementary products and markets
through acquisitions respectively. Finally, a merger, suggesting no corporate
coherence between a bidding firm and a target firm, is called a conglomerate merger.
No matter what method it takes in a merger or acquisition, the key point is the two
companies have a buyer-seller relationship. It is usually the norm that larger firms,
with advantages of assets or sales, acquire smaller businesses.
On the other hand, when viewed from the financial perspective, mergers and
acquisitions can also be categorized as operating mergers and financial mergers (Wen,
Wang and Wang, 2005). An operating merger means that the operating activities of
two firms are integrated to achieve economic gains whereas financial mergers exclude
operation integration.
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2.2 Motives for M&A
One of the most critical motives for M&A is to generate more economic efficiency
and effectiveness, through economies of scale and scope in particular. These mergers
and acquisitions aim to bridge the gap in capitalizing, increase market share, enhance
customer service quality, and implement strategic initiatives, rather than simply
reduce costs (Wen, Wang and Wang, 2005). To be more specific, as Andrade et al.
(2001) explain, there are three major driving forces for M&A deals: (a) acquire the
market clout, (b) take advantage of opportunities for diversification and competitive
advantage, and (c) increase efficiency through size effects. With the enormous
benefits, M&A practices proliferated during the 1990s (see Section 2.4). Brealey et al.
(2008) also demonstrate the reasons why two firms may be worth more together than
apart: economies of scale, economies of vertical integration, complementary resources,
surplus funds, eliminating inefficiencies, and industry consolidation. Through merger

and acquisition efforts, both firms manage to ensure survival, generate more free cash
flow, benefit managers and most importantly, gain potential economic profits (Barney
& Hesterly, 2010).
2.3 Industry-specific M&A analysis review
As mentioned above, with high expectations, mergers and acquisitions have been
applied in various industries and markets, such as airline, banking, manufacturing and
service industries. Accordingly, many scholars and researchers have explored the
impact of M&A activities have on specific industries. Nickerson (1995) develops a

“durability adjusted index” to study the concentration levels more precisely in the
durable goods industry and draws a conclusion that “the current enforcement efforts
are biased against durable goods industries”; similarly, Ford and Jackson (1997)
employ an empirical model to test the effect of concentration levels in the cable
market and suggest that the increased concentration level in cable industry lowers the
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programming cost and charges consumers lower price; Kim and Signal (1993) also
investigate the effect of M&A deals have on the airline industry but find no evidence
for higher price charged by merged firms than the non- merged. In these mergers and
acquisitions, government regulations and policies need to be considered as well, apart

from accounting, financing and taxes. Another surprising finding is, as certain
industry-specific studies have outlined, the post- merger performance is not always
positive in spite of initial high expectations of M&A. In addition, compared to a large
number of studies in other industries, there is not an extensive body of empirical
research to investigate mergers and acquisitions in the media industry.
2.4 Reasons for media M&A
The past two decades have witnessed the dramatic expansion of the number of
communication scholars, industry practitioners and policy makers who focus on
media activities and their influence (Doyle & Firth, 2006). This can be attributed to a
number of reasons. The new technologies (e.g. cable television, broadcast satellite,
and internet) have transformed both the shape and scope of media businesses,
accelerating the globalization process of communication networks. Meanwhile, the
introduction of neo- liberal politics has produced “a climate of deregulation and
privatization” of national media industries, shifting the attention of media academics
and policymakers from political to economic issues (Andrews, 2003). Currently most
media firms are commercial organizations, whose primary goal is to create profits and
sales to fund growth and development. Even for those non-profit media firms, profit is
also critical in supporting content creation and other operations (Picard, 2002). The
transition to digitalization and privatization helps to break down barriers among
various media platforms and facilitate more integration processes (Chon et al., 2009).
As a result, the late twentieth century saw an enormous round of mergers and
acquisitions all over the world. Acquisitions, mergers, takeovers, and joint ventures
became much more frequent during this period (Warf, 2003). In this context, the AOL
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Time Warner merger, a consolidation of new and old media, is a case in point. Taking
these changes together, media management and financing are seen as relatively new
subjects, which deserve further exploration.
2.5 Distinctive characteristics of media M&A
2.5.1 Characteristics of media products
It is worth noting that media M&A are different from those in manufacturing and
service industries, which involve the combination of unique media characteristics as
well. In fact, it is these characteristics that have influence on media managers’
decision making and strategic choice. According to Chan-Olmsted and Chang(2003),

to begin with, media firms provide “dual, complementary media products of content
and distribution”; secondly, dual sources from consumers and advertisers help
produce revenues, which means the business model for media firms should meet the
need of both consumers and advertisers; furthermore, most media products are
non-excludable, therefore, the content consumption of one individual does not affect
the other (i.e. the marginal cost is minimal); moreover, it is often the case that
customers receive media products via multiple distribution outlets (e.g. cable and
broadcast network). Consequently, the total revenues for media products are
calculated from the total number of distribution channels in different time periods,
rather than one single distribution point; lastly, media products are sensitive to cultural
preferences and proximity and are often affected by the regulatory control in the
targeted country (Sylvie, 2008). In this regard, entry in new geographic markets or
culture will not be an easy job.
Taking account of these factors together, media firms are more inclined towards
efficiency gains to test whether M&A deals are right choice (Peltier, 2004). Compared
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to mergers and acquisitions in other industries, media M&A tend to focus on

long-term efficiency, cultural factors and influence, instead of simple financial data.
The listed characteristics of media products above also lead media companies to
consider more when the integration choice needs to be made.
2.5.2 Value creation process of media products
Similarly, the value chain of media products also differs from other products, which
has an impact on media M&A. It is generally acknowledged that the media is about
providing content to consumers (Stephan, 2005). The process of value creation behind
media activities can be investigated in a vertical sequence, which starts from how the
media product is created and produced, and finishes with how it is sold and consumed
by the customers (Doyle, 2002). When looking into the specific stages of the value
chain in the media industry, we can find three major stages. The first stage involves
content creation, which takes centre stage of the whole value creation process. The
second stage mainly deals with production and packaging. All media products must be
incorporated into marketable components that can be distributed to the market. The
final stage is the distribution of products to consumers. In fact, distribution channels
vary. Some media products depend on traditional retail channels, some through
telecommunication (e.g. radio, television and the Internet), and others are with the
help of exclusive distribution networks (Stephan, 2005). However, it is true that not
all the activities mentioned above are necessarily managed in- house. The activities in
the value chain can be operated by independent firms. A large number of media
companies have outsourced part of production to external suppliers, which, in turn,
provides an immediate impetus for vertical integration.
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2.6 Determining factors of successful M&A
In the light of aforementioned findings, a wide range of studies have examined factors
in determining the successful completion and outcomes of M&A deals. These studies
have concentrated on the cultural perspectives, organizational culture in particular
(Olie, 1994; Schraeder & Relf, 2003), as well as the human resource management
perspectives, exploring significant HR issues raised in the merger and acquisition

process (Napier, 1989; Schuler & Jackson, 2001). However, few of them have
conducted an applied synthesis of various strands of prior research on media M&A
and proposed associated recommendations for media firms.
Besides, Muehlfeld, Sahib and Witteloostuijin (2007) find that in spite of some
firm-specific variables, three general elements also have an impact on the success of
completion, which are: the attitude of business activity, method of payment, and the
percentage of control sought by the purchase company. Carapeto et al. (2010) also
tests the relationships between business expectations and M&A activities by applying
regression analysis, and concludes that three components of expectation – analyst

expectations, management expectations and media expectations – have a relatively
strong predictive power.
When taking a different approach to the reason for M&A failures, Gershon (2006)
argues there are a few reasons which could explain why some M&A deals fail. More
specifically, one reason is the lack of a compelling strategic rationale. With unrealistic
expectations of complementary strengths, both companies fail to materialize proposed
synergies and end up facing a crisis. In addition, some companies borrow a large
amount of loan to finance their M&A transactions. However, they have to sell the
whole division to meet loan obligations when the combined company has an awkward
performance and fails to generate economic profits. M&A deals are broken down by a
heavy financial burden in the end. Another explanation is the failure to conduct a
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thorough due diligence. The lack of careful investigation hides several costly
problems, which, in the aftermath of the merger, begins to emerge and ruin previous
advantages. Last but not least, post-merger planning and integration failures also
result in the disappointing tragedy. If the proposed merger does not include a clear
plan for future operations and strategy, the two companies are likely to come across
frictions and problems. Kummer and Steger (2008) also discover some other factors.
Unrealistic expectations, (over)confidence, external advice, distrust and group
dynamics make all the difference to the result of mergers and acquisitions.
2.7 Evaluation of media M&A
Among all the media business practices, mergers and acquisitions (M&A) have been
regarded as the most dominant means for diversification (Peltier, 2004). Unfortunately,
when it comes to economic effects of mergers and acquisitions in media industry,
there is no unanimous argument from the standpoints of scholars, practitioners and
other professionals.
Proponents claim that the economies of scale and scope, brought by mergers and
acquisitions, will enhance organizational efficiency and globalization process
(Kranenburg, 2001). For instance, Porter (1980) maintains the identified and exploited
interrelationships among associated businesses tend to reduce costs and facilitate
differentiation. Pitofsky (1992) also mentions the tremendous economic benefits

brought by mergers in discarding inefficient operations. According to Chan-Olmsted
(1998), convergence, through mergers, acquisitions, and other alliances, helps with
the implementation of new technologies and thus captures a developed customer base.
Media M&A, at the same time, enable firms to integrate the content creation,
packaging and distribution stages in the vertical supply chain, thereby creating value
by acquiring market power. Furthermore, mergers allow greater flexibility in
capitalization, by accessing both internal and external resources (Lang and Stulz,
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1994). Chaudhri’s (1998) findings demonstrate that the duality in media product space
can render media monopoly pricing inconsistent with conventional neoclassical theory.
In the media market, taking high fixed cost and low marginal cost into consideration,
media providers can earn more advertising revenues by lowering the price of products
and gaining increased customer base. As a consequence, the win-win situation helps
promote competitive advantage and penetrate new markets. Picard (1996) claims that
mergers within one specific industry tend to combine strengths and reduce
competitions. Horizontal integrations enable firms to rely less on the suppliers and
distributors and therefore gain more market power. In terms of firms which seek
geographical diversity, M&A deals can also be beneficial in reducing risks and
offsetting the negative effects of economic downturn in a particular region. Put this
way, numerous media firms view M&A as a chance for rapid growth and massive
expansion.
On the other hand, other studies raise the issue of eco nomic rationality of mergers and
acquisitions in the media industry. In this respect, based on the Media Access Project
survey, 70% of Americans hold the belief that media companies are too large to merge,
and integrations among them will not help in impro ving service quality. Warf (2003)
suggests that M&A activities weaken market competitiveness to an extent, and more
importantly, erode the local culture and undermine the independence of media with
the existence of specific media empires. Managers also find it difficult to handle the
complicated task of integrating varied accounting methods, corporate governance
strategies and production methods, which may pose another threat to M&A success
(Brealey et al., 2008). In fact, KPMG reports that over 80% of mergers and
acquisitions fail. Disappointing mergers fail to achieve synergies and profits that are
previously hoped for.
There is another group of scholars and researchers considering the convergence
through M&A deals and related patterns. This can demonstrate a new trend for media
M&A. Chan-Olmsted (1998) argues that M&A activity levels are about to increase
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and the surge indicates a trend toward strategic alliances after the 1996
Telecommunications Act. Chon et al. (2003) examine structural changes in the
information industries and find a negative impact the deregulation policy has on
cross- industry mergers and acquisitions. These findings suggest structural differences
before and after 1996, which are contrary to the research mentioned above. At the
same time, Picard (1996) investigates economic motives and noneconomic rationales
for how media conglomerates are constructed.
2.8 Summary
Although mergers and acquisitions are of growing interest in organization and
management studies, an applied synthesis of various strands of research is still needed

in terms of media M&A, which are fruits of digitalization and deregulation. These
dramatic organizational restructurings have been studied from a variety of
perspectives, such as corporate culture and human resource management.
In addition, just a limited amount of literature incorporates the impact of financial and
economic variables, like corporate financial strategy, financial data, and external
economic conditions into research framework. Historically, a firm’s size was seen as a
source of size effects thus could help generate more economic and strategic benefits.
However, this is not always the case in reality.
Meanwhile, scholars, media practitioners and policymakers cannot agree on the topic
of economic efficiency of media merger and acquisition transactions. Nevertheless,
media researchers have not placed emphasis on financial aspects yet and few of them
have applied a synthesis of existing literature.
The aim of this paper is to examine merger and acquisition activities in the media
industry, draw up a synthesis of normal patterns of media mergers and acquisitions in
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prior literature and give advice on successful media M&A. The empirical focus in this
paper is on the merger between America Online and Time Warner, regarded as the
combination of “new” and “old” media.
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Chapter 3 Methodology
3.1 Introduction
In this dissertation, qualitative methods, coupled with analysis of financial data, are
utilised simultaneously for triangulation purposes and to complete the story.
Triangulation, combining benefits of both qualitative and quantitative methods,
applies mixed research strategies to cross-check the findings and allows investigation
from different perspectives (Bryman & Bell, 2007). Put this way, limitations of each
approach can be compensated by using alternative method and bias is likely to be

reduced to promote a better understanding of the subjects (Hammond, 2005).
In terms of research designs, case study is viewed as the preferred way for its
capability of presenting the detailed and intensive analysis (Bryman & Bell, 2007).
Accordingly, the inductive reasoning approach is applied so that findings and

observations can explain theories. More specifically, this chapter has been organized
as follows:
1. Underlying philosophy of research
2. Rationale for case study method and how it fits with research questions
3. How data are collected and associated criticism
4. Measurements of data.
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3.2 Underlying philosophy of social research
As guidelines for most qualitative researchers, interpretivist philosophy emphasizes

“the understanding of meaning people attach to their experience ” (Schutt, 2006)
whereas positivism, as a contrasting epistemology to interpretivism, is the belief that
objective reality can be observed and understood, and follows general laws (Bryman,
2008). This paper aims to take account of people’s feelings and meanings they attach
to these feelings (e.g. cultural conflicts) during the cultural integration process
through an applied synthesis of existing literature thereby discovering subjective
aspects of human experience and possible reasons for media M&A failure. However,
an integrated philosophy of both helps to improve insights into social activities. As a
result, the triangulation approach has been proposed to discover what has been
observed deeply as well as the subjective factors which may have an impact on the
conclusions and data collection.
3.3 The rationale for the selected methods
3.3.1 Why case study?
As consistent with research questions, which intend to explore economic rationality

behind media M&A activities, data needed should demonstrate specific facts and
details occurred in media mergers and acquisitions. Viewed from this perspective,
case study is the most proper way to analyse data thus answer research questions.
According to Yin (2003), there are five types of cases: the critical case, the
extreme/unique case, the representative case, the revelatory case and the longitudinal
case. The AOL Time Warner merger case is therefore best described as the extreme
case, for its record high value as well as strong influence.
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Case studies make it possible to demonstrate the understanding of nature in business

activities, in terms of the techniques, systems and procedures (Yin, 2003). Stake (1995)
also claims that case study implies “the particularity and complexity of a single case”.
Case study helps to create a thick description of the social setting and provides
holistic interpretation in the specific environment (Geertz, 1973). Compared to other
designs (e.g. surveys and experiments), the researcher ’s goal is to expand theories
rather than calculate frequencies (Yin, 2003). Furthermore, since the research topic
mentioned in this dissertation remains relatively new in academia and practice, there
is not an applied synthesis of structured documents yet. Case study, on the other hand,
attempts to avoid such difficulties and concentrates on detailed knowledge of several
media firms. The final reason is the difficult access to case companies, media
conglomerates in particular. Focusing on one or two firms seems to be more efficient
and time-saving. In this dissertation, I will take a close look at the specific AOL Time
Warner merger and explore economic rationality of media M&A in this context.
In the light of reasons mentioned above, a single-case research has been selected due
to time limitation and particularity of the case. The empirical focus in this article is on
the merger between America Online and Time Warner. The AOL Time Warner merger
is considered as the most prominent M&A activity in the media industry and
illustrates the power of large media firms. From the business perspective, critical
lessons can be learned from the AOL Time Warner merger.
3.3.2 A critical evaluation of case study
On the other hand, it is true that case study researchers often apologize for their
inability to generalize their findings because the case study research is always
concerned with small samples even a single unit. Viewed from this perspective, a case
study is illustrative of a small sample base, which, inevitably, demonstrates difficulty
in generalizing a statistical conclusion from the covered population (Schutt, 2006).

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Compared to survey research, which frequently adopts random sampling to enhance

the representativeness of the samples as well as the validity of findings, the evidence
presented by case studies seems to be limited so that external validity is challenged.
Another problem is the social researcher cannot be a completely neutral observer

when looking into social reality (Schutt, 2006). Researcher bias exists among the
interpretations of social facts, which results in no “objective” case study. However,
such bias can be minimized when evidence or research data is collected by several
researchers with different backgrounds, education and experiences. In this dissertation,

a selective collection of data produced by various scholars facilitates a more balanced
interpretation of data.
Finally, whether the relationship between the researcher and subjects (e.g.
organizations, companies etc.) can strike a balance is also the key to the quality of
study. As the case study goes deeper, more information (usually confidential
information) is required. This may be concerned with ethical issues. In this paper, a
large amount of secondary data conducted by prior researchers will be reused to
enhance theories and maintain good relationships with the subjects simultaneously,
thus further avoid serious ethical problems.
Despite this, case studies are still of importance, for they can provide an intensive
examination and rich details of a single case, which entails quality theoretical
reasoning and connections between theory and data. As with Yin’s (2003) argument,
the major concern for case study research is not whether the findings can be applied to
other cases, rather how the researcher generalizes useful theories out of facts. In this
dissertation, I will attempt to explore economic rationality of media M&A and the
underlying failure reasons through a synthesis of existing scholarship and data, and
finally support theories with the help of substantial facts.
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3.3.3 A critical evaluation of data collection
Data adopted in this paper are mainly from organizational documents in the public
domain, such as annual reports, mission statements, and public relation materials for
content analysis. As Bryman and Bell (2007) maintain, a description of organizational
behaviours and history is available with the help of documents, and insight into
managerial decisions also provides researchers with a “timeline” of organizational
change. These documents form the basis for detailed accounts of research data thus
are critically important. During the data selection process, Scott’s four criteria (Scott,
1990) are utilised to ensure creditability, transferability, dependability and
conformability. To ensure these criteria can be satisfied, a selected collection of
America Online and Time Warner corporate statements, newsletters, transcripts of
chief executives’ speeches and external consultancy reports constitutes empirical
support data. However, it is true that organizational documents in public may not be
an accurate representation of facts due to the limitation of organizational actors’
perceptions and standpoints (Bryman & Bell, 2007). They tend to have an angle of
understanding they want to get across. Therefore, unavoidably, such organizational
documents remain partial to an extent.
Having taken these aforementioned factors into consideration, a practical addition to

this data group is mass media output. Mass media such as newspapers, television
programmes, films and magazines are potential sources for business study ( Bryman &
Bell, 2007). In spite of the demerits, which sometimes may include uncovered error
and ethical issues, they equip social researchers with a more detailed examination of a
particular topic from different aspects. In order to overcome potential pitfalls, news
reports from well-known media organizations, such as The Economist, are for further
reference in this dissertation.
Apart from that, coupled with huge benefits, secondary analysis of qualitative data is
23
also applied in this paper. For example, a second study of journal articles which have
been published already about AOL Time Warner will be conducted. In fact, second
analysis has become a focus of discussion with increasing frequency. With a large
amount of information generated by prior researchers, secondary analysis is likely to

help draw up new conclusions from the present materials. On the other hand,
Hammersley (1997) also maintains that reuse and re- interpretation of qualitative data
may be affected by the second researcher’s limitation of understanding. Nonetheless,
in this paper, survey research (including questionnaire and observation) and
interviews are not realistic for business elite, who ha ve specialist knowledge on M&A
but are hardly available for such activities, thus can be quite time-consuming and
expensive. Taking advantage of secondary data collected by others allows
higher-quality data and more time in data interpretation (Bryman & Bell, 2007).
There is also a simple quantitative component (i.e. financial data used for
triangulation) in this paper. As with Bryman’s (2008) belief, more often than not,
triangulation is associated with a quantitative research strategy and is useful in the
integration of two research strategies. In this study, in order to present the comparison
between pre-merger and post- merger, DataStream, the largest historical financial
database, is being applied to analyse the effect of mergers and acquisitions. Specifics
such as stock price and sales revenue over ten years or more can clearly indicate the
rise and fall of America Online and Time Warner respectively, thereby exploring
economic rationality of media M&A in a numerical way.
24
3.4 Measurements of financial performance
As there are multiple aspects when assessing financial performance of a particular

company, in this dissertation, several variables are examined to carry out a more
objective investigation. For instance, EBITDA (Earnings before interests, Taxes,

Depreciation, and Amortization) is used to measure cash earnings and tell the
operating performance of the target firm. Net income and ROA (Return on Assets)
imply the level of profitability and managerial efficiency. EPS (Earnings per Share) is
another indicator for the value of stocks and shareholders’ investment decisions.
25
Chapter 4 Analysis of results
4.1 An overview of the merging parties
As a leading-edge Internet service provider in the United States, AOL offers an

extensive network of niche content sites, tools and platforms. Its business includes
online content, products and services on both its owned and ope rated premises and
third-party websites. Founded in 1985 as “Quantum Computer Services”, AOL went
public on NASDAQ in 1993 and helped connect thousands of home users to the
Internet. The year 1998 witnessed AOL’s acquisition of CompuServe and ICQ.
Moviefone and Netscape also joined its suite of products later (AOL Time Warner,
2000). However, the biggest turning point occurred in 2001, when AOL merged Time
Warner to form AOL Time Warner for $162 billion. Unfortunately, this did not
produce enormous benefits as expected, instead, forced the company to operate
independently with the previous name and offer services at no cost. AOL is currently
an independent, public-traded company, reporting a net loss of $782.5 million, and
$7.42 per diluted share for 2010.
Time Warner, a global leader in media and entertainment, was established in 1990, as
the fruit of the merger between Time Inc. and Warner Communications. With a strong
collection of brands such as New Line Cinema, CNN, Warner Bros, the CW
Television Network etc., it aims to gain competitive advantage and excellence with
the help of industry- leading scale and brand awareness (Time Warner, 1998). The deal
with AOL, announced on 10th January 2000, was expected to enable Time Warner to
have deep access to millions of new customers. However, due to the failed synergies,
Time Warner suffered from an unwieldy corporate structure and decided to spin off
AOL as a separate company in 2009. The $16.03 million loss for the fourth quarter of
2008 was a stark contrast to a $1.03 billion profit for the same time period of 2007.
26
With disappointing loss, both companies failed to achieve the initial M&A goals in the
pre-merger stage. In the following part, I will investigate more details in pre-merger,
integration and post-merger stages respectively and explore economic rationality of
media M&A in the AOL Time Warner case.
4.2 Pre-merger
At first, financial analysis and assessment of the external environment and target
company need to be undertaken from the beginning thoroughly (Augwin, 2007). This
critical process includes selection of the target and valuation of the bid. Figure 1
illustrates the main steps in the M&A process.
Figure 1 Stages in the M&A process
27
At the time, AOL owned 27 million subscribers, which accounted for approximately
40% of the total US online subscribers. AOL’s original business model was to provide
services and content to residential customers via dial- up connections. With the growth
in Internet popularity, AOL adopted aggressive marketing strategy and gained rapid
growth in the late 1990s. However, it was worth mentioning that no major deals
existed between AOL and cable companies for delivery (Gershon, 2006). Cable
modems just emerged as the equipment for residential users who wanted high-speed
Internet access. It seemed that AOL’s business strategy, relying on local telephone
lines and satellite delivery as channel of services, was about to behind the times.
Meanwhile, AOL did not have any real content either. Furthermore, AOL’s financial
performance was relatively weak compared to its share price. Surprisingly enough,
AOL’s shares were priced at fifty- five times its earnings, which was illustrative of
vulnerabilities. The top management team at AOL then realized that this situation
could be ameliorated with the help of the merger or acquisition with a firm which had
hard assets and large cash flow (Picard, 2006). In looking to the future, AOL was in
need of something more than a well-established service experience or business model
shift.
Time Warner, on the other hand, appeared to be a strong player in both media content
and developed high-speed cable delivery. As a vertically integrated entertainment
company, Time Warner possessed cable systems covering more than 18% of cable
users in the United States (Rubinfeld & Singer, 2001). It was the second- largest cable
operator in America, only following AT&T. On the other hand, Time Warner also had
its own weaknesses. For instance, like many other traditional media firms, Time
Warner was found to be slow in coping with rapid changes in communications
technologies and incapable of exploiting opportunities in the new media field fully.
Additionally, the huge debt load accumulated from upgrading of cable systems
impeded its further growth and expansion (Picard, 2006). At the same time, neither
did Time Warner have much strength in internet operations.
28
With good performance in its individual area, the two companies were expected to
provide complementary strengths and eliminate weaknesses to each other. In this
respect, target was selected because financial gains were possible through the gaining
of vertical integration and economies of scale. At the time, the AOL Time Warner
merger was regarded as a representation of blending old media with new in the
industry. The marriage between the two seemly enabled all the efficiencies to realize,
both to the business itself and consumers. In this way, consumers would be likely to
access better service and technology (Chambers & Howard, 2006). To be more
specific, an AOL Time Warner combination would equip Time Warner’s 13 million
cable households with faster Internet service and interactive software products and at
the same time, offer America Online broadband distribution capability. It presented a
large number of opportunities for online distribution in music, video and other Time
Warner content. The combination was anticipated to be a win- win situation and, with
its massive financial profitability and corporate power, to create a media giant in
American history.
4.3 The integration process
The merger was announced on 10th January 2000, which entailed an all-stock
combination priced at a staggering $350 billion in market value and combined
revenue of more than $30 billion annually. As a result, to be named AOL Time Warner,
the new business’s brands included AOL, Time, CNN, Warner Bros., ICQ, HBO,
Netscape, CompuServe, People, AOL Instant Messenger, TBS, TNT, Cartoon
Network, Digital City, Warner Music Group etc. (AOL Time Warner, 2001). With the
marriage between the leading ISP and media firms, AOL Time Warner made it
possible to provide an advanced platform for AOL’s interactive services and gain
further growth with the help of cross- marketing strategy. The new established
business included over 130 million subscriptions, 266 million web users and 268
million magazine readers (AOL Time Warner, 2001). Apart from that, AOL and Time
29
Warner were expected to take numerous opportunities to combine their own assets to
drive various services and marketing capabilities for shareholders and employees in
areas of music, entertainment, broadband, news, technology and telephony.
Financially speaking, according to the terms of an agreement approved by unanimous

votes, America Online needed to discount the value of its shares by one- fourth and all
the stock of the two firms were converted to AOL Time Warner stock at fixed ratios.
More specifically, each stock owned by Time Warner shareholders was converted to
1.5 shares of AOL Time Warner and AOL shareholders would receive one share of
AOL Time Warner stock for each share AOL stock they possessed. Consequently,
when complete, shareholders of America Online owned 55% of the new firm whereas
Time Warner shareholders have an approximate 45% interest (AOL Time Warner,
2001). Before the deal was announced, Time Warner shares were trading for $65
dollars but went up to $110 dollars under the terms of merger, which created
approximately 70% more value than they previously had in the stock market (Picard,
2006).
When viewed from a human resources perspective, this merger also included
cooperation between top management teams. Steven Case, Chairman and CEO of
America Online, became the Chairman of the new company AOL Time Warner. His
main responsibility was to build and lead the new company and focus on
technological developments and global expansion initiatives. Time Warner ’s
Chairman and CEO, Gerald Levin, became AOL Time Warner’s CEO. Gerald Levin
was in charge of the new firm’s strategy management and oversaw its operations.
What's more, an integration committee composed of Bob Pittman (President and COO
of America Online), Richard Parsons (President of Time Warner), Kenneth Novack
(Vice Chairman of AOL) and Richard Bressler (Chairman and CEO of Time Warner
Digital Media) was established to ensure a successful integration of the two firms.
The committee made its recommendations and reported to Steven Case and Gerald
Levin (AOL Time Warner, 2001). The AOL team planned to lead the newly enlarged
30
business.
4.4 Post-merger
In spite of high expectations, AOL Time Warner ’s performance, brought by the

so-called mega merger, was quite disappointing. Generally speaking, data analysed in
the case fails to indicate a positive correlation between media firm size and corporate
economic performance. Instead, nowadays, AOL Time Warner marriage is viewed as
one of the biggest failures in American history and both companies are still paying for
its own loss. The following section will take a close look at the merger failure from
the perspectives from finance, HR and culture respectively.
4.4.1 Finance
As can be seen in Table 1, financial data are illustrative of the surprising inefficiency
of the AOL Time Warner merger and thus can be applied for comprehensive
triangulation. According to figures in AOL Time Warner annual reports, in April 2002,
two years after the deal was made, the so-called media giant reported a loss of $54
billion. At the end of 2002, the loss grew up to approximately $99 billion, making it
the highest loss in American corporate history. Taking account of this, Time Warner
dropped AOL from its name in 2003, which suggested the failure of synergies, and
spun off AOL entirely in 2009. Unfortunately, the miserable result was far from the
end. Having been affected by the associated negative performance, Time Warner
Cable and Time Warner Entertainment had to split and Time Warner also decided to
spin off some of its oldest properties.
31
Table 1: Operation and performance indicators for AOL Time Warner (in
millions)
2000 2001 2002
Total Revenues 7,605 37,166 40,961
Cost of Revenues (3,866) (20,533) (24,315)
Net Income (Loss) 1,121 (4,934) (98,696)
ROA 16.93% (2.28%) (38.49%)
Profit Margins 14.74% (13.28%) (240.95%)
EBITDA 7,732 9,054 8,722
EPS 0.48 (1.11) (22.15)
Source: AOL Time Warner annual reports
32
Similarly, share price in the stock market also reflected failed synergies between the
two firms almost immediately. Actually, the past decade has witnessed the decrease in
the stock price of Time Warner (see Table 2). As can be seen in the table, the period
between 2000 and 2002 saw a significant decline in spite of some minor fluctuations.
In fact, stimulated by the merger news, AOL share price went up from $68 to $74 on
the announcement day. On Time Warner’s side, its shares increased dramatically from
$65 to $92. However, oddly enough, only in the following month, there was a drop in
AOL and Time Warner shares, which were at $55 and $77 respectively. Thereafter, the
company began a rapid decline. The worst time was when AOL Time Warner share
price dropped below $10, valuing the “giant” at just $61 billion, which was dwarfed
by the figure of $350 billion at the time of merger.
33
Table 2 Financial situation of Time Warner over the past 15 years
D A T A S T R E A M E QU IT IE S 0 5 /0 8 /1 1 1 4 .4 3
TIM E W A R N E R
Mn e m o n i c - U :T W X Ge o g ra p h y C o d e - U S In d u s try Gro u p - B R D E N
Loc al Code - U88731730 E xc h a n g e - N e w Y o rk S e c to r - ME D IA
C u rre n t P ri c e 3 2 .0 2 0 0 0 4 /0 8 /1 1 Fi n .Y r L o c S td I /B /E /S
1 2 Mth R a n g e High 3 8 .2 0 0 0 2 8 / 2 /1 1 1 2 /1 0 0 6 /1 1 1 2 /1 1 1 2 /1 2
Low 2 9 .4 9 0 0 3 0 /1 1 /1 0EPS 2 .2 5 2 .3 2 2 .7 7 3 .1 5
PE 1 4 .2 1 4 .4 1 1 .6 1 0 .2
P ri c e C h a n g e 1 m th 3 m th 1 2 m th P E R e l . 8 8 .1 %
(U $ ) -1 3 .2 % -1 1 .1 % -2 .6 % P /C a s h 3 .5 0 (% =R e l to S & P C OMP )
(? -1 4 .4 % -1 0 .6 % -5 .6 %
R e l a ti ve to S & P C OMP D i vi d e n d R a te (U $ ) 0 .9 4
-3 .2 % -1 .1 % -8 .7 % D i vi d e n d Y i e l d 2 .9 4
D i vi d e n d C o ve r 2 .5
Ma rke t V a l u e (U $ ) 3 3 4 5 3 .7 4 M D i v L a s t Fi n Y e a r 0 .8 5
A d j u s te d to (? 2 0 4 8 8 .5 8 M L a s t D i v P a i d QT R(U $ ) 0 .2 3 5 T a x- G
P a y D a te 1 5 /0 6 /1 1 X D D a te 2 6 /0 5 /1 1
P r ic e a nd Inde x (r e ba s e d)
200 (U $ ) 1 2 /0 8 1 2 /0 9 1 2 /1 0
T o ta l s a l e s 46984M 25785M 26888M
P re -T a x P ro f. -1 8 6 5 7 M 3 3 4 6 M 3 9 1 3 M
150
P ubl. E P S -7 .7 2 2 .0 7 2 .2 5
Cas h E P S 9 .2 4 9 .2 4 9 .1 6
100 Mkt to B k V a l 0 .8 5 1 .0 2 1 .0 8
R OE (% ) -2 6 .5 8 6 .5 2 7 .7 7
50
N o . S h a re s i n Is s u e 1 0 4 4 7 7 7 (0 0 0 s )
V olum e 1 0 9 2 4 .9 (0 0 0 s )
0 P e rc e n ta g e o f fre e fl o a t 89%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 V o l a ti l i ty 4
TIM E W AR N ER B e ta 1 .2 6 2
S&P 5 0 0 C O M PO SITE ( PI) C o rre l a ti o n 0 .8 4 5
So u r c e : Th o m s o n D a ta s tr e a m
34
Another aspect is unveiled accounting scandals of America Online. The main reason
that America Online could acquire a firm whose sales revenue was five times larger
and net income was almost 2.5 times higher lies in the capital America Online had
(Picard, 2006). With the stock market’s interest in internet shares, AOL’s market
capitalization was almost twice that of Time Warner. Moreover, in fact, AOL shares
were massively overvalued. According to findings in a series of internal investigations,
it was a large number of “materially false and misleading financial statements” that
helped AOL afford such a lavish bid price (AOL Time Warner: A steal. n.d.). Viewed
from this perspective, AOL was in a quite vulnerable position to merge with Time
Warner at the time. Finally, the end to the unhappy corporate union was announced on
9th December 2009, when Time Warner declared the completion of the spin-off of
AOL Internet unit.
After the divorce, AOL is in still trouble and its share price has continued to decline
over the last three years (see Table 3 and Table 4).
35
Table 3 Financial situation of AOL over the three years
36
Table 4 Performance indicators for AOL between 2006 and 2010
31/12/2006 31/12/2007 31/12/2008 31/12/2009 31/12/2010
Total
7786700 5180700 4165800 3257400 2416700
Sales
Total
- 6228800 4127100 3826300 2703900
Assets
Operating
1376800 1484200 1109400 699300 371700
Profit
EBITDA - 2363300 (686300) 866600 (616400)
Net EPS - - - 2.35 (7.34)
Source: AOL annual reports
37
4.4.2 Human resources
In the aftermath of the AOL Time Warner merger, it is worth mentioning that a
surprising and dramatic shake-up took place at the senior executive level. This
included Levin’s retirement, due to managerial conflicts with Steve Case, and
Pittman’s forced resignation in July 2002. The integration team failed to live up to
previous expectations. In January 2003, Steve Case, who always came under attack
because of the company’s poor performance, decided to leave his chairman position.
All of the personnel changes demonstrated a failed business strategy, and more
importantly, weakened the corporate power of AOL Time Warner further.
4.4.3 Culture
The process of cultural integration also plays a critical role in mergers and
acquisitions (Weber & Camerer, 2003). If they are not managed well, cultural
differences may lead to more productivity problems such as low levels of trust and
cooperation (Bijlsma-Frankema, 2001). Therefore, it is important to find ways to
work together and understand the other ’s perspectives. When looking at the AOL
Time Warner case, the culture clash between the two presented tremendous obstacles
to their combined operations. AOL adopted the loose dot-com organizational culture
whereas as a traditional media company, Time Warner was more inclined to a
buttoned-down approach to media management. Most people at Time Warner did not
like its Internet division and thought AOL people to be arrogant (Time Warner and
AOL: from :-) to :-(, n.d.). When asked about AOL, one executive at Time Warner
said, “If they negotiated for one dollar, they would demand two. There was a
mentality of arrogance” (Klein, 2003). When AOL executives came up with new
initiatives, Time Warner did not appreciate the thought all the time. This, in turn,
placed more pressure and displeasure on AOL people. AOL management teams felt
38
ignored by Time Warner. For example, an AOL official said, “I never really loved it
[the merger] and I thought from the moment the merger was announced that,
ultimately, Time Warner would control much more of the company than the AOL
side” (Klein, 2003). Another instance was people at Time Warner would like to use an
e-mail system built by Microsoft, rather than its own Internet division AOL. To sum
up, the two distinct corporate cultures hindered the proposed synergies and integration
process.
4.5 Reasons for merger failure
In reality, the high failure rate of mergers and acquisitions often results from failure in
the integration process (Nguyen & Kleiner, 2003). However, factors contributing to
M&A failures are complex. In terms of the AOL Time Warner divorce, through an
applied synthesis of collection of news reports, corporate annual reports and published
books on the AOL Time Warner merger, the following section intends to explore the
underlying reasons from two angles: external and internal.
4.5.1 External factors
 Economic conditions
The dotcom revolution in the 1990s boosted rapid growth of Internet firms and made
it possible for them to be highly valued. America Online was a case in point. Due to
the Internet bubble, AOL was among the most highly valued companies by market
capitalization (Klein, 2003). It was such nature of Internet economics that allowed
AOL to buy a traditional media giant with inflated new technology dollars through a
corporate stock swap. Unfortunately, after a decade, the dot-com bubble burst and a
large number of Internet firms suffered. The most symbolic sign was the NASDAQ
39
index decline of hi-tech shares by 10% on 14th April 2000. After that, there was a
tendency for hundreds of dot-coms to be short of capital and even acquired. America
Online was no exception. The pessimistic market environment and economic
downturn, with no doubt, undermined AOL’s future growth. The AOL Time Warner
merger occurred at the start of 21st century, which happened to be during the most
fragile period of dot-com companies, and unavoidably, was affected.
 Antitrust investigation
Due to monopoly fears, it took almost one year for US anti-trust regulators at Federal
Trade Commission (FTC) to investigate and negotiate. The merged business, if
approved, would be the largest media company in the world at the time. In order to
address anti-trust concerns, FTC required that Time Warner provide open access to its
cable system to its competitors in the same industry apart from offering “advanced”
Instant Messaging (IM) services. The one-year delay bought the competitors of AOL
Time Warner more time for better preparation and impaired investors’ enthusiasm.
Some advantages of the company’s products were lost as well.
4.5.2 Internal factors
 Failure to perform due diligence
Under the circumstances of intense negotiation, the merging parties sometimes failed
to perform due diligence before the merger agreement (Gershon, 2006). Only in the
aftermath of the merger did they realize that expected objectives could be impossible
and make a huge loss. Looking back upon the AOL Time Warner merger, one major
reason why the combination did not work as expected was the fact that AOL was
never an equal counterpart to Time Warner. Prior to the merger agreement, Time
Warner was lacking in a thorough due diligence of the other party, which hid potential
40
problems and costs. Due to the Internet bubble, AOL was overvalued and appeared to
be as strong as Time Warner so that AOL shareholders had the same voting rights and
power. However, once the bubble burst, AOL found itself financially weaker than
before because of rising debt and a falling share price. At the same time, it was
reported that fraud existed in the pre- merger phase (Klein, 2003). In order to secure its
purchase, AOL transferred “ephemeral paper wealth into something more substantive ”
(AOL Time Warner: A Steal, n.d.). The massively exaggerated wealth was spotted
only three years later when share price shrunk 90% less than the pre- merger peak.
According to the main accusations at the time, some of AOL’s claimed revenues from
advertising actually came from elsewhere and in the meantime, the other was no
revenue at all. Put this way, the lack of due diligence concealed AOL’s true financial
situations and put obstacles to their further integration.
 Failure to implement visions
Vision plays a critical role in M&A success (Nguyen & Kleiner, 2003). A merger with
unrealistic expectations would easily have a negative impact on shareholder value. In
the AOL Time Warner merger case, the main problem was many seemingly good
ideas at the first sight turned out to be disappointing and useless as time went on. As a
result, the media consolidation failed to grasp market opportunities to gain market
share, but became a heavy burden for each other instead. For example, they were
unable to discover new trends and patterns in the digital industry. Internet telephony
or Voice over IP (VoIP) was a case in point. AOL Time Warner claimed to be a
dominant player in the digital revolution. Nevertheless, it was incapable of building a

successful business model based on that and fell behind its rivals. Furthermore,
through its fusion of new and old media, the company was expected to realise
synergies and promote new ideas. However, a combined music platform was devised
by its rival Apple (with the introduction of the iTunes Music Store), who gained first
mover advantage in this area. Similarly, the combined firm lost the opportunity of
developing personalized web services as well. Consequently, this not only led to the
41
decreasing number of subscribers to its Internet services but also the heavy loss of
advertising revenues (Klein, 2003).
 Cultural clash
Differences in organizational culture between America Online and Time Warner are
also responsible for the failure. Both entities were characterized by strong and distinct
cultures (see Table 5). The entirely different ways in which the two companies were
operated and managed made them less likely to be integrated well: while the culture
of Time Warner, as a traditional New York-based company, is genteel and
buttoned-down, America Online favoured a more entrepreneurial and laid back
management style, which reflected the values of the Internet age. One executive at
AOL once said “I cannot imagine two more different cultures. The two companies do
not speak the same language. It is going to be a wild ride” (Klein, 2003). Viewed from
this perspective, the differences mentioned above made a smooth transition into a
merged entity difficult. More specifically, the problem of cultural incompatibility
resulted in four more serious barriers:
 Teams’ communication was frustrated as a result of differing cultural norms

(Picard, 2002). AOL’s direct style of communication clashed with the indirect
style stressed by Time Warner’s culture.
 Young, open and active employees at AOL had a different working language from
their older and more formalistic Time Warner counterpart, which could easily
cause misunderstanding and dissatisfaction in the team-based projects.
 The centrally managed AOL people had difficulty in adapting themselves to the
divisional structure of Time Warner (Verma, 2007).
 As an aspect of corporate culture, decision making process also differs.

42
Compared to Time Warner’s slow and measured process, AOL tended to value process
efficiency and was inclined to a more rapid way.
Table 5 The comparison of corporate culture between AOL and Time Warner
America Online Time Warner
Hi-tech Traditional media
Cost-cutting Spendthrift
Casual, Khakis and cotton shirt Suit and tie
Compensation - Stock options -

Profit sharing – Old school
Internet trend
Small, young Big, mature
Unitary culture Diversified enterprise
Focus on stock price Focus on organic business growth
Source: (AOL Time Warner: leadership in organizations, n.d.)
43
In spite of the big role cultural conflicts play in producing merger failure, they are still
always neglected when consolidation benefits are examined. In fact, after the
announcement of the AOL Time Warner combination, many articles pointed out the
challenge of cultural integration (Nguyen & Kleiner, 2003). The dramatic personnel
shake- up at the senior management level in 2002 further reinforced this argument to a
certain extent.
 Lack of strong leadership
Mergers and acquisitions, more often than not, increase employees’ uncertainty and
stress levels. In the meantime, there seem to be a lower level of job satisfaction,
loyalty, commitment, and trustworthiness (Nguyen & Kleiner, 2003). Put this way,
there are urgent calls for strong leadership at the senior management level. Mergers
require that top management teams focus on the biggest challenge during the
post-merger period. As the top leaders in the AOL Time Warner deal, Steve Case and
Gerald Levin, failed to develop true leadership to head the M&A process. When it
comes to the newly combined business, leadership did not exercise enough
organizational control and help create employee accountability. Neither America
Online nor Time Warner did persuade their employees to make the deal work. An
attitude of “us vs. them” prevailed and both sides showed little trust in each other.
Another aspect is the lack of motivation and confidence of top management teams
frustrated investors and employees. As the person who devised the merger plan, Steve
Case admitted his failure of the whole integration plan and re garded himself as the
wrong person for doing the job at that time. The fact that Case quickly sold his shares
in AOL demonstrated his lack of confidence and a weak commitment, which, in turn,
left employees, investors and consumers questioning about the combination prospect.
Finally, Steve Case was at odds with Time Warner executives personally. Nevertheless,
AOL executives were still chosen for key positions in the company. This evoked more
44
conflicts and clashes between the two entities. Taking account of this situation, it was
not surprising that the market reacted negatively. Accordingly, another negative
impact was the problem of recruiting and retaining best talent. The weak leadership
and less chance to become rich through an IPO made AOL suffer from a loss of key
talent.
4.6 Recommendations for successful M&A
Based on the analysis of the AOL Time Warner integration failure, another issue was
raised: what factors can contribute to the success of media mergers and acquisitions?
How can companies avoid pitfalls in this process? Although there is no
“one-size- fits-all” solution to possible problems during the post-merger integration

process, the following guidelines, learned from the AOL Time Warner case, can be
useful and practical.
 Concentration on communication
Broadly speaking, the communication process includes communication with the

combined company’s employees and its customers. One is to provide up-to-date,
precise, factual and consistent information for employees, which can help increase the
coping abilities of employees and loyalty. Therefore, employees can equip themselves
with the pending changes and the entire stage of M&A. This, in turn, will enhance
employees’ efficiency and productivity. Put this way, the smooth communication
ensures a win- win outcome, rather than uncertainty and fears brought by the changed
corporate management strategy. Corporate culture, on the other hand, although being
regarded as resistant to change to a certain extent, can make slight changes for better
integration. Cisco has been a good case in point, whose principle is “Communication
early, often, and honestly”.
45
Another one is effective communication effort with customers. Initially, customers

may not feel secure and confident about their purchasing decisions. Taking account of
this, the new company must assure clients its service quality, personnel, strategy and
future plan so as to retain customer loyalty.
 Effective leadership
Successful mergers and acquisitions are in need of mature senior executives. As the
builders for the combination process, they should demonstrate support and persuade
employees to accept the new work patterns as well as culture. Active involvement in
implementation is also their top priority. According to Schuler and Jackson (2001),
successful leaders of the new business should be open- minded to suggestions and
flexible. The person is also required to have the ability to manage the change process
and have clear vision for the whole structure and planning.
 Awareness of cultural and emotional issues
Cultural differences exist in most of transactions of mergers and acquisitions.
However, it is true that they can hardly change in a short period. Merging with a
business which has a distinct organizational culture may create potential threats in the
future. Nevertheless, cultural clash can be avoided by educating staff the different
ways of working in the other entity. Orientation sessions on a regular basis, for
example, can allow employees to ask questions and avoid confusion. Change
management training can also enhance their ability to cope with change.
Teams for each company should also notice the strength and weakness of the other
and more importantly, show respect and friendliness. This can be achieved through
providing positive feedback and fostering an amicable environment.
46
Chapter 5 Conclusions
Over the past several decades, the media industry has been flooded by all kinds of
mergers and acquisitions, including media consolidation and media convergence cases.
Through a detailed study of the AOL Time Warner merger in the US, this paper
answers related research questions regarding economic rationality of media M&As
and attempts to explore underlying failure reasons in the specific case by drawing on a
synthesis of prior research. The main goal is to help media companies realize the trend
of media development and overcome problems during this process. Generally
speaking, in the media industry, organizational size, which is a mixed blessing, does
not guarantee success. To be bigger does not mean to be better. When it comes to this
paper, three research questions focus on media M&A economic rationality, failure
reasons and feasible advice.
Firstly, by looking at the AOL Time Warner merger case, it is found that expected
M&A synergies and greater economic efficiency through economies of scale fail in
reality, which is consistent with Peltier’s (2004) argument that there is no necessary
link between a firm’s size and possession of massive assets and its economic
performance. According to the aforementioned findings and analysis, disappointing
performance in three areas of finance, personnel management and cultural integration
fails to realize the initial M&A blueprint. In the aftermath of the merger, surprisingly,
there was a dramatic decrease in the combined firm’s share price. As a result, only two
years after the merger announcement, the company had to suffer from a
record-breaking loss. Apart from that, change in senior executive teams and failure to
develop an assimilated organizational culture could only accelerate the divorce
process of two entities.
Furthermore, a synthesis of prior research on more in-depth reasons for the failed
merger is conducted. Both external and internal factors contribute to the unsuccessful
47
situation. American economic downturn and the delay in FTC approval at the time
made the company lose the advantages it could have to a certain extent. However,
more fundamental reasons lay in the corporate level. Time Warner did not conduct a
thorough due diligence before the final agreement, which ignored AOL’s financial
problems and revenue fraud. The merging parties also lacked the ability to combine
strengths and develop new products. Weakness in planning and implementation made
the company lag behind its rivals and lose more market shares. Another significant
problem presented is cultural incompatibility. The traditional buttoned-down culture
clashed with the typical loose dot-com culture seriously. Employees from both sides
were unpleasant and frustrated, which spelt bigger trouble in communication, team
building and decision making process afterwards. In the meantime, lack of strong
leadership made employees feel unsecure and unorganized as well.
Finally, practical and feasible suggestions are proposed to future media M&A deals.
Although there are a large number of contextual factors, issues regarding
communication, leadership and cultural integration are worth more attention. During
the whole stage of media mergers, employees must be aware of strategic plans,
corporate changes, different ways of working and so forth. Successful leaders are
capable of taking good control of the M&A process and demonstrate support and
confidence. It is also worth mentioning that many methods such as orientation
sessions and change management training can be taken to avoid cultural conflicts.
On the other hand, it is true that taking account of the nature of case study (i.e. the
small sample being studied), more empirical evidence needs to be collected and
analysed to test the robustness of the results. Besides, the difficult access to senior
management teams at America Online and Time Warner leads to some limitations of
this work, which makes it highly dependent on companies’ annual reports, news
articles and academic literature. Another possible limitation of this dissertation lies in
relatively short period of study.
48
Nevertheless, the dissertation still provides an applied synthesis of various strands of

prior research on the AOL Time Warner deal. Detailed analysis into this example
allows future media companies to have a rational attitude of media mergers and be
aware of possible pitfalls.
In spite of the media M&A failure experienced by America Online and Time Warner,
other M&A transactions between specialized firms seem to be efficient and profitable,
such as the combination of Reed and Elsevier in 1990s (Peltier, 2004). Taken together,
there is a need for further investigations. In the future, research results can be
enhanced and improved by (1) enlarging samples and applying quantitative analysis;
(2) gaining direct and wide access to senior media managers for more inside
knowledge; (3) increasing the number of years during the post- merger period to test
expected synergies and outcomes.
In the end, regardless of the company’s size, it must identify its competitive advantage
and sustainability. Corporate growth through media mergers and acquisitions may
appear to be a more prevailed method. However, it is worth noting that largeness
produces both pros and cons and is not the answer to all the problems the company
encounters (Picard, 2006). The key point is, for any case, there is no
“one-size- fits-all” strategy and contextual conditions must be taken into consideration.
Managers at successful media firms are always keen to improve the quality of
products and service to meet the demands of customers and make their best attempt to
achieve higher goals and clear vision continually.
49
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Bigger is stronger?

Case study on the AOL

Supervisor: Abigail Schoneboom

22nd September 2011

Dissertation submitted in part fulfilment of the degree of MSc in Management with

The York Management School

This dissertation aims to explore economic rationality of media mergers and

synthesis of prior research. In addition, a series of suggestions for more successful

Key words: media, mergers and acquisitions, economic rationality

I give my sincere gratitude to my supervisor Dr Abigail Schoneboom who despite her

guiding my future work.

1.2 Research questions ........................................................................................... 7

2.3 Industry-specific M&A analysis review ....................................................... 10

2.6 Determining factors of successful M&A ...................................................... 14

3.2 Underlying philosophy of social research..................................................... 20

3.4 Measurements of financial performance....................................................... 25

4.4.1 Finance .................................................................................................. 31

4.5.2 Internal factors ...................................................................................... 40

1.1 Area of interest

expanding, profitable and widely-present organizations (Picard, 2002).

sizes, there is no unanimous argument in terms of their economic rationality. For

on M&A in the media industry from the standpoint of economic rationality.

1.2 Research questions

1.3 Structure of dissertation

The following chapter (Chapter 2) presents a comprehensive understanding of results

After that, Chapter 3 gives an implication of underlying philosophy of social research

Chapter 2 Literature Review

2.1 The definition and classification of M&A

According to Barney and Hesterly (2010), based on the characteristics of industries

2.2 Motives for M&A

surplus funds, eliminating inefficiencies, and industry consolidation. Through merger

2.3 Industry-specific M&A analysis review

impact of M&A activities have on specific industries. Nickerson (1995) develops a

acquisitions, government regulations and policies need to be considered as well, apart

research to investigate mergers and acquisitions in the media industry.

2.4 Reasons for media M&A

2.5 Distinctive characteristics of media M&A

2.5.1 Characteristics of media products

decision making and strategic choice. According to Chan-Olmsted and Chang(2003),

to mergers and acquisitions in other industries, media M&A tend to focus on

consider more when the integration choice needs to be made.

2.5.2 Value creation process of media products

2.6 Determining factors of successful M&A

perspectives, exploring significant HR issues raised in the merger and acquisition

regression analysis, and concludes that three components of expectation – analyst

2.7 Evaluation of media M&A

differentiation. Pitofsky (1992) also mentions the tremendous economic benefits

There is another group of scholars and researchers considering the convergence

Although mergers and acquisitions are of growing interest in organization and

management studies, an applied synthesis of various strands of research is still needed

approach can be compensated by using alternative method and bias is likely to be

Accordingly, the inductive reasoning approach is applied so that findings and

1. Underlying philosophy of research

3.2 Underlying philosophy of social research

As guidelines for most qualitative researchers, interpretivist philosophy emphasizes

3.3 The rationale for the selected methods

3.3.1 Why case study?

As consistent with research questions, which intend to explore economic rationality

Case studies make it possible to demonstrate the understanding of nature in business