AOL Time Warner Merger Case Study

The AOL Time Warner MergerA Failure of Synergy

By: Adham Mohamed GhalyTo: Dr. Ziad Rotaba

Contents

IntroductionAmerica Online:

Brief HistoryStrategic FormulationStrategic ImplementationStrategy EvaluationIndustry AnalysisOrganizational Culture and Structure

Time Warner:Brief History: Time Inc.Brief History: Warner Bros.Brief History: Time WarnerStrategic FormulationStrategic ImplementationStrategy EvaluationIndustry AnalysisOrganizational Culture & Structure

Contents

AOL Time Warner:The MergeStrategic FormulationSituational Analysis: StrengthsSituational Analysis: WeaknessesSituational Analysis: OpportunitiesSituational Analysis: ThreatsStrategic Formulation – RevisitedStrategy Evaluation

Introduction

This case analyzes the merger between Time Warner and AOL.

The merger had been established in 2001.

The case presents how lack of synergy– if not handled properly - can produce catastrophic effects on corporate success.

The case defines how Corporate Culture and Organizational Structure are assets as important as Physical and Financial resources.

America Online

1983: Steve Case worked for Control Video, an online gaming services firm.

1985: The company changed its name to Quantum Computer and launched an online service named Q-Link.

1989: The company expanded upon Q-Link with a new nationwide service named America Online.

1991: Finally, the company itself had been named America Online.

Brief History

1992: The company’s Initial Public Offering.

1993: Steve Case became CEO.

1994: Number of subscribers reached 1 million.

1995: AOL Europe had been created.

1996: Number of subscribers reached 5 million.

America OnlineBrief History

“ A brand company, committed to continuously innovating, growing, and investing in brands and experiences that inform, entertain, and connect the world. ”

America OnlineStrategic Formulation

Steve Case placed AOL as the online service for people unfamiliar with computers.

Steve Case focused on Marketing as a competitive advantage compared to his competitors.

AOL was a pioneer in creating GUI chat services, Interactive online gaming, and the Chat room concept.

AOL adapted its services to multiple HW and SW platforms: Apple II, Apple Macintosh, IBM PC, Commodore 64, DOS, Windows, Mac OS.


Products: Online Portals, Web Browsers, Instant Messengers, Online Gaming, Video Streaming.

Markets: Individuals and Firms.

Functions Served: Marketing, Advertising, Entertainment, Communications, e-Commerce.

Revenue Generation Mechanism: Advertising, Subscriptions.


On the Corporate Level, the company follows a Diversification Strategy, both in related and non related businesses.

On the Business Unit Level, the company follows Broad Differentiation strategies, to appeal to as much consumers as possible and to victor over competitors.


The company implemented its strategies from Within, by relying on its own knowledge and resources, and from Outside, by relying on Mergers, Acquisitions, and Mutual Agreements.

America OnlineStrategic Implementation

The company’s strategy paid off well:Stock value had grown 50,000 percent since the IPO.The company bought its main competitor CompuServe in 1998.The company at its peak had 30 million subscribers.The company became the premier ISP in USA.

America OnlineStrategy Evaluation

AOL had been operating in a High Technology market, still in the growth phase.

Internet Technology had been young, with very fast growth and development ahead.

Companies competed with Technological Innovation.

Highly successful firms had no physical assets that match their worth.

America OnlineIndustry Analysis


Time

Development

AOL


AOL is a Hi-technology driven company, with a culture of Risk Taking, Innovation, and Flexibility.

The company had fast paced, highly-reactive management culture.

The company had an Adhocracy structure, where support staff are the most powerful (e.g.: R&D), creating a Pull to Collaborate and tending to differentiate their products.

America OnlineOrganizational Culture & Structure

Time Warner

1922: Henry Luce and Briton Hadden created Time Inc., a publishing firm.

1923: The Company published its first magazine, Time.

1930-36: Launched Life and Fortune magazines, despite the great depression.

1954-74: Launched Sports Illustrated, Money, and People.

1970: The company entered the Cable Television market.

Brief History: Time Inc.

Time Warner

The company also founded Home Box Office (HBO), a premium cable service.

Today, the company publishes 130 magazines.

Brief History: Time Inc.

Time Warner

1923: The Warner brothers founded Warner Brothers Pictures.

1926: Patented the vita phone process.

1928: Produced the first full length film with sound.

1929: Introduced Color films.

1930s: The company was producing 100 films a year.

Brief History: Warner Bros.

Time Warner

1969: Was acquired by Steven Ross’ Kinney National Services.

The company became one of America’s largest music producers and cable television operators.

Brief History: Warner Bros.

Time Warner

1989: Time Inc. and Warner Communications merged.

The company was worth $14 billion ($138 billion in today’s money).

1996: The Company acquired Turner Broadcasting System.

This brought WTBS, CNN, and TNT into the Company’s portfolio.

The company became the 2nd biggest cable company in the United States.

Brief History: Time Warner

Time WarnerBrief History: Time Warner

Time Warner focused on Quality and Variety of Content as a competitive advantage compared to its competitors.

On the Corporate Level, the company followed a Diversification Strategy, both in related and non related businesses.

On the Business Unit Level, the company follows Broad Best Value strategies, to appeal to as much consumers as possible and to victor over competitors.

Time WarnerStrategic Formulation

Products: Books, Magazines, Cable TV Services, Music, Retail, Theme parks, Film Production & Distribution.

Markets: Individuals and Firms.

Functions Served: Journalism, Publishing, Media Production, Advertising, Entertainment, Cultural Services.

Revenue Generation Mechanism: Advertising, Sales, Subscriptions, Ticketing.

Time WarnerStrategic Formulation

Time Warner had been operating in a Mature Technology market.

Time WarnerIndustry Analysis


Time

Development

Time Warner


The company had genteel, buttoned-down culture.

Companies operating in mature industries are risk averse and have conservative management systems.

As a multi-layered company, the company had a Divisionalized form structure, with Middle Management personnel highly affecting the firm’s operations, creating a Pull to Balkanize and Standardizing Output. This is natural for a company that follows a Best Value approach.

Time WarnerOrganizational Culture & Structure

AOL Time Warner

10 Jan, 2000: Steve Case and Gerald Levin announced the merger.

AOL would pay $183bn in Stock for Time Warner.

AOL would assume $17bn of Time Warner’s debt.

AOL would own 55% of Time Warner.

Stock combination value was $350bn.

The Merge

AOL Time Warner

AOL was the 1st Internet Service Provider in the US.

Time Warner was the 2nd Cable company in the US.

Combined revenue was over $30bn.

The Merge

“ Create the world’s first global, fully integrated media and communications company for the internet century ”

AOL Time WarnerStrategic Formulation: Vision

“ Delivering Branded Information, Entertainment, and Communications across converging media platforms and changing technologies ”

AOL Time WarnerStrategic Formulation: Mission

“ Speeding growth of interactive medium to provide far reaching benefits to the customers ”

“ Offering vast array of world class content to accelerate availability of Broadband Interactive Services ”

AOL Time Warner

Physical/Technological Resources:Unparalleled assets and infrastructure.The company owned the whole supply chain for Content Creation, Management, and Distribution.Owns one of the most advanced Fiber Optics and Digital Technology networks.Vast array of World-Class Media Content.Technologically advanced Broadband Delivery Systems.AOL now has a new Broadband Distribution Platform .Added Value for AOL, attracting more users: Very Rich online content, discounts on movies, magazines, and cable subscriptions for subscribers.Warner Bros. retail stores will allow AOL to market its services widely.AOL disks will be included in Time Warner’s product shipments.AOL will accelerate Time Warner’s Digital Transformation.Popular AOL products will be available for Time Warner’s Road Runner users.

Situational Analysis: Strengths

AOL Time Warner

Human Resources:Unparalleled resources of Creative and Journalistic talents.Excellent Management expertise.

General Organizational:Excellent Reputation: AOL was the 1st ISP and Time Warner the 2nd Cable Operator.Huge Customer Base: 30 million AOL subscribers and 12.7 million Time Warner customers, also Time Warner’s magazines had more than 268 million readers.Alliances with leading brands and retailers, making advertising a huge source for revenue.The combination of Time Warner’s content and cable with AOL’s Internet distribution capabilities makes the merger so difficult to duplicate.The merge will allow both companies to go global.


AOL Time Warner

Knowledge and Learning:The company is on the edge of all new innovations and technologies.

Financial Resources:Stock Combination valued at $350 bn.Combined Revenues of more than $30 bn in the US.Combined Revenues of more than €250 mn in Europe.The ability to take in more debt if necessary.The company’s Financial strength allows it to follow an aggressive acquisition strategy.Online promotion will reduce money spent on newspaper and advertising media.Cross-Marketing will reduce the marketing budget significantly.The ability to cut divisional costs as direct mailing costs are cut in favor of online renewal services..Warner Music can digitally distribute its content rather than manufacture millions of compact discs.


AOL Time Warner

Physical Resources:AOL suffered for some time from Low Quality of Service.AOL’s delivery infrastructure suffered from the Last Mile Problem.

Human Resources:Top Managers in both companies had no information about the merge, and many of them had concerns and reluctance.Execution Risk: Huge difference in Culture due to difference in Technology phase can cause an effect of Lack of Synergy if not addressed properly.Too many big names in the executive management team, which can create problems in decision making.The new management team weighs heavily in favor of AOL, which can create problems.

Situational Analysis: Weaknesses

AOL Time Warner

General Organizational Resources:Neither AOL nor Time Warner had a major global position, AOL Time Warner conducted less than 20% of its business abroad.Time Warner had a bad reputation among internet investors as an Old, Traditional, Slow Growth company.The company structure was strange for investors and cannot be easily valued.AOL’s business model needs time and significant capital investment.

Financial Resources:Time Warner suffered from huge debts, from which AOL assumed $17bn.Share prices were declining due to the prolonged approval process.AOL Time Warner’s combined value was $205bn after approval of the deal.Time Warner suffered from high depreciation and interest charges.

Situational Analysis: Weaknesses

AOL Time Warner

Technological Factors:The rapid Conversion between Media, Computing, and Communications Technologies.The rapid growth of Internet Technologies and its Uses.

Socio-Cultural Factors:The emergence of a new generation, eager to get the most out of the internet.

Economic Factors:Huge investments in e-companies during that period.

Situational Analysis: Opportunities

AOL Time Warner

Market Conditions - US:AOL’s added value will secure it from local competition and raise the entry barriers.The entry barrier is already high due to required investments.The company can now raise prices, as it provides unique services to its customers.The bargaining power of customers is high, as Entertainment services are not crucial for peoples’ lives.The bargaining power of suppliers is low, as the company owns its own suppliers.Competition was intense only in the Media and Cable markets (Disney), while in the ISP market AOL had a huge gap ahead of its competitors.

Situational Analysis: Opportunities

AOL Time Warner

Governmental/Legal Factors:The merge needed approval from the FTC, which was a lengthy process.The FTC was concerned about antitrust issues and cable access concerns about the merge.The merge needed unexpected additional approval from the FCC.Operations in Europe needed approval from the European Commission.Time Warner had to drop its joint venture plan with EMI to move ahead with AOL merger.AOL had to detach Bertelsmann AG to move ahead with Time Warner merger.

Socio-Cultural Factors:A potential risk was a strike by screen actors and writers, which can have negative impacts on the company.A problem of protecting Intellectual Property Rights on the internet.Customer unwillingness to pay add-on subscription fees.

Situational Analysis: Threats

AOL Time Warner

Economic Factors:Volatile stock prices resulted from the change in investor base.The dot-com bubble was at AOL’s door, changing many firms from dot-coms to dot-gones due to devaluation in technology stocks.Investors were concerned about the merger, specially after the failure of Lycos-USA Networks merger in 1999.Inevitable withdrawal of short term investors’ money while the company awaited approval.Economic Volatility: Completely uncontrollable and unpredictable economic factors.

Technological Factors:Solving AOL’s last mile problem globally would be very expensive.Interoperability among separate Instant Messaging brands was a major concern.


AOL Time Warner

Market Conditions – US & Global:Increased Uncertainty about the market at that time.The Advertising Market – a major source for revenue – was softening.Technology alternatives existed such as: Satellites, Fiber Optics, and DSL. Intense competition from the following firms: Vivendi Universal, NewsCorp, Walt Disney, Bertelsmann


AOL Time Warner

On the Corporate Level, the company is seeking Vertical Integration of the supply chain, while at the same time keeping the company diversified in its business.

On the Business Unit Level, the company is seeking Broad Best Value approach.

Strategic Formulation - Revisited:

AOL Time WarnerStrategy Evaluation:



Management did not take into account the importance of Organizational Culture and Structure for ensuring survival.

The company failed to address Cultural Differences among its employees, although it had unmatched physical, technological, and human resources.

The Structure of the management team caused huge conflicts among employees, specially from Time Warner’s side.

The company had no specific structure as it had a mix between a Divisionalized firm and an Adhocracy based firm. This created conflicts among personnel.

The company also suffered from AOL’s surprising devaluation because of the dot-com bubble.


“ The value of this merger lies not only in what it is today but in what it will be in the future ”

Bob Pittman, AOL Time Warner COO - Jan 2000


He was right

AOL Time Warner Merger Case Study

Business

competitive

changing market

business unit

revenue generation

time warner

aol time warner

organizational

market conditions