Stupid Business Decisions: Time Warner Merges With AOL
The disastrous deal should pass into history "like the Vietnam War."
Enough ink has been spilled on the deal to fill a lifetime supply of fountain pens. The reasons are plenty. For starters, it offers a neat signpost of the rise and fall of the tech bubble. It's also fascinating to consider how so many supposedly smart people could make such a spectacular mistake.
"The blame could go to the billions of dollars in market value evaporating during the bust, or management's stubbornness in promising more than it could deliver, or doing all the wrong things at the wrong time," as one CNET writer has observed. For the architects of the deal, he continued, "grand visions of an Internet-charged media behemoth faded into the bland realities of turf wars and cutthroat politics."
With the recent 10th anniversary, those architects like Steve Case, AOL's co-founder, and Gerald Levin, then Time Warner's CEO, have resurfaced to tell their stories, most notably for a lengthy New York Times retrospective.
In 1999, when Levin and Case began wooing each other, the Internet was seen as this mighty force about to transform the world -- and overnight. An older media company, Time Warner, and its highest executives, Levin and Chairman Dick Parsons, didn't want to be left out in the cold. Internet start-up launches were as routine as breakfast, and the world, or at least the business press, hailed AOL as the one that had made it. It had trounced all others in email and dial-up connection.
When the deal was announced on January 10, 2000, the companies said it was a "merger of equals," but in reality AOL shareholders got about 55% of the new company, with the rest going to Time Warner shareholders. That day, Case said, "This is a historic moment in which new media has truly come of age."
Some executives inside the companies disagreed, but surprisingly, many of them only found out about the deal the morning of the announcement or the weekend before. Don Logan, then head of Time Inc., now says, "Dumbest idea I had ever heard in my life." Ted Leonsis, a division president at AOL, has said, "I was one of the loudest advocates for not doing the deal."
Nobody lost more than Ted Turner, who was the largest individual shareholder in the new company and lost 80% of his net worth.
"I'd like to forget it," Turner told the New York Times. "I almost didn't do this interview because I didn't want to dig it up again. Let it pass into history. The Time Warner-AOL merger should pass into history like the Vietnam War and the Iraq and Afghanistan wars. It's one of the biggest disasters that have occurred to our country."
Back in 2000, criticism of the merger was absent from the mainstream media, which went absolutely wild in their coverage. The tone adopted by the press was almost religious. The big price tag surely had something to do with it. The Wall Street Journal ran something like 20 articles on the deal's intricacies, and overall, use of the word "transformative" was a broken record. People thought the world had taken a new course, but in that optimistic milieu, nobody could quite say how.
Five months later, the dot-com bubble began to burst and AOL's advertising revenues cratered. It also became obvious that AOL was damaged goods. Alec Klein, then a reporter at The Washington Post, uncovered that AOL had been improperly inflating its advertising revenue, and his 2002 stories led to Justice Department and SEC investigations, followed by billions of dollars in fines and write-downs.
(Read about AOL's entanglement with Purchase Pro's "Charles Junior Johnson" in Famous and Infamous Dot-Commers: Where They Are Now).
By this time, the clash of cultures between AOL and Time Warner had already grown fierce. News of accounting fraud allegations at AOL gave Time Warner's side even more ammunition. In 2003, Time Warner dropped AOL from the company name. The combined values of the companies after separating in December was about one-seventh of their worth the day of the merger.
In hindsight, AOL led the first vanguard of the new media parade, ahead of companies like Yahoo (YHOO), MSN (MSFT), and Lycos that have also suffered. A few years after the merger, another company -- Google (GOOG), of course -- had determined that dial-up connections would be eclipsed by broadband, and it would focus on what you did online instead of how you got there.
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