That didn't end well...

AOL-Time Warner: Worst Merger In History

September 20 by Cristóbal Crespo

It’s the year 2000. Time Warner’s cable networks are captivating America (and beyond) with shows like Sex and the City and The Sopranos. Its Warner Bros. movie studio is just about to release Lord of the Rings and Harry Potter.

But that wasn’t quite enough for the media powerhouse…While it commanded people’s attention on both big and small screens, it had no share of desktop screens. What it badly wanted was an online presence.

Meanwhile, AOL was the dominant online player at the time, providing dial-up Internet to millions of American households.

It seemed to be a match made in heaven. Or was it?

A perfect couple

Time Warner had the hots for AOL’s 25 million subscribers. While AOL wanted to take advantage of its prospective partner’s cable network and content. Like a beauty queen’s nuptials to a rich old man, an AOL-Time Warner merger looked like a logical marriage of convenience.

Despite the fact Time Warner made way more revenue, AOL was the larger company by market capitalisation (that’s the market value of all a company’s outstanding shares). So it would buy Time Warner for US$164 billion, with its shareholders controlling 55% of the new company.

The deal would be the largest merger in history. Ted Turner, who would become AOL Time Warner’s vice president, said the merger was “better than sex.” (Though it’s worth noting that a year later, his wife Jane Fonda asked for a divorce…So maybe for him, anything was better than the sex he was or wasn’t having.)

The beginning of the end

In hindsight, this match was more like a fling with no future.

When they got together, AOL was at its peak. But little did both know it was just standing on the precipice of a steep downward decline. Remember how we said it was a provider of dial-up Internet? (Just let that dinosaur concept sink in for a second as you imagine the beeps and screeching sounds of a 56K modem.) Well, high speed broadband started spreading like a STD, causing AOL’s once dominant market share to evaporate before its bewildered eyes.

Then there was the explosion of the dot-com bubble, which destroyed other once-mighty tech companies like Pets.com. Ad dollars went up in smoke – terrible for AOL since advertising was one of its main cash cows.

This led AOL to post a record, gob-smacking $99 billion loss in 2002. At the time, it was the biggest loss ever to be reported by a company.

Before the merger, the combined value of the companies was $290 billion. By the time the merger was done and dusted a year later, the value had shrunk to $126 billion. Kind of like how a car’s value sharply goes down the moment you drive it off the dealership lot…

The total value of AOL’s shares subsequently plunged from $226 billion to $20 billion.

Bad romance

The romance soured as quickly as milk left out of the fridge during a heatwave.

On the surface, it had seemed like a sensible pairing. In practice, it was like putting zebras and lions in the same cage and expecting everyone to just get along. Both companies had vastly different cultures, resulting in a lot of friction and clashes. This also resulted in a cascade of purges and resignations.

With all the woes plaguing AOL, its demise seemed inevitable… In fact, by 2003, the company was dropping the “AOL” from its name.

Even though AOL had acquired Time Warner, it was the one that ended up losing all its power and value after the merger. Imagine going into a store to buy a new iPhone but you emerge not only without the phone – you’ve also lost the shirt on your back.

The moral of the story? Don’t be quick to celebrate corporate unions because not all mergers have fairy-tale endings.

 

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