Professional Documents
Culture Documents
Aol Time Warner
Aol Time Warner
Table of Contents
Executive Summary
Time Warner
History
Market Situation Prior Merger
Reasons for Merger
3
4
5
AOL
History
Market Situation Prior Merger
Reasons for Merger
6
7
8
Proposed Synergies
10
Proposed Valuation
12
13
Appendix
16
Works Cited
25
Executive Summary
The merger of AOL and Time Warner has been judged to be a merger between two companies in fear. AOL feared that its business
model needed continual adaptation to a changing internet and wanted to ensure broadband access. AOL needed to continue its growth
by acquisition strategy in order to justify its high market capitalization. Time Warner feared that its outdated network of traditional
media outlets (television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift. Time Warner believed that
for it to remain competitive it needed an immediate injection into the internet.
But mergers out of fear are rarely successful. The valuation that analysts predicted (above $90 per share) never persisted as the two
companies have not been able to fully integrate. AOL and Time Warner have not been able to formulate a strategy which can help the
combined company move forward, the managers have failed to win the support of all divisions, and the dynamics and technologies of
the internet have changed and have left AOL behind.
Time Warner
History
The history of Time Warner traces back to Warner Brothers. According to the popular legend, four brothers convinced their father to
sell his golden wristwatch and to buy one of the first cinematographs (Edison-cinetoscope). With this cinematograph, the four brothers
went from town to town showing films to the rural population. Later, they produced their own films. Warner Brothers has been
formally registered in 1923 in Hollywood. In 1925, Warner brothers went public and in 1930 they launched their popular cartoon
series. The Looney Tunes, such as Bugs Bunny and Daffy Duck were central figures and shaped the companys image in the public.
Warner Brothers made a number of well-known classic films, such as Casablanca and a number of Hitchcock thrillers. Warner
Brothers also began to acquire many record labels.
In 1989, Warner Brothers merged with the publishing house Time to Time Warner. Time acquired Warner for about US$14 Billion and
transformed it into a multi-media company consisting of record labels, motion picture as well as television production and distribution,
studio facilities and film libraries, television networks, book and magazine publishing. In order to increase its product portfolio Time
Warner acquired Turner Broadcasting System in 1996 and hence became the second largest cable television network. Its printing arm
could secure more than 20% of all expenses for print advertisement in 2000 in the US, which makes it the dominant player. The
history of the company shows that Time, Warner, and Turner Broadcasting grew through acquisition strategies (Exhibit 1: Time
Warner History).
AOL
History
AOL was founded in 1985 under the name Quantum Computer Systems, as a popular interactive services firm providing content and
services to residential customers via dial-up modems. Originally, customers who subscribed to AOL were limited to AOL content and
e-mail (as was typical of online service providers at the time). AOL was the first on-line service requiring the use of proprietary
software, instead of a terminal standard program, resulting a graphical user interface well ahead of the competition (AOL was
considered the online service for people unfamiliar with computers, in contrast to its main competitor CompuServe, who was oriented
to the technical community). As the Internet grew in popularity, AOL also provided Internet access to the World Wide Web in
addition to its proprietary content. In 1991 it changed it name to America Online Inc. The simple intuitive interface and an aggressive
marketing led the company to extremely rapid growth in the late 1990s, fueled by a large number of acquisitions and geographical
expansion. AOL aggressively pursued an acquisition strategy to increase its online presence and desire to provide members with
original, interactive, and needed content (Exhibit 2).
Rosenberg , Scott. AOL and Time Warner's marriage of insecurity. Salon.com Technology. Jan 10, 2000.
http://archive.salon.com/tech/col/rose/2000/01/10/aol_time/index.html.
The AOL/Time Warner Merger
Where Traditional Media Met New Media
Kamal Kishore Verma
Proposed Synergies
When AOL and Time Warner announced their merger in 2000 they had a clear vision of their synergies. AOL believed that the
combined companies had the means to be uniquely positioned in order to bring interactive media into customers everyday lives and to
further penetrate this market.
The merger will combine Time Warner's vast array of world-class media, entertainment and news brands and its
technologically advanced broadband delivery systems with America Online's extensive Internet franchises, technology and
infrastructure, including the world's premier consumer online brands, the largest community in cyberspace, and unmatched
e-commerce capabilities. AOL Time Warner's unparalleled resources of creative and journalistic talent, technology assets
and expertise, and management experience will enable the new company to dramatically enhance consumers' access to the
broadest selection of high-quality content and interactive services.
By merging the world's leading Internet and media companies, AOL Time Warner will be uniquely positioned to speed the
development of the interactive medium and the growth of all its businesses. The new company will provide an important
new broadband distribution platform for America Online's interactive services and drive subscriber growth through crossmarketing with Time Warner's pre-eminent brands.2
AOL at that time was believed to have the necessary experience to help Time Warner transform their divisions to the digital channels.
Additionally Time Warner was believed to help AOL build next generation broadband. Together with Time Warner, AOL believed they
could build a set of brands customers trusted in. Additionally, AOL Time Warner thought of building up facilities beyond just personal
computers but also involving wireless devices, television, phones or PDAs. With the help of Time Warner AOL thought it could
deliver any kind of content at any time to any place (AOL Anywhere). As most likely synergies of the merger the board of AOL
regarded cost reductions and opportunities of growth. Revenue opportunities were seen in areas such as advertising, growth
opportunities were seen in increased numbers of cross-promotion and marketing for Time Warners content through the channels of
AOL. Efficiency increases were seen in marketing across different platform and distribution systems, cost synergies were likely to
arise due to shared business functions (i.e. R&D and cost efficiencies because of launching interactive extensions of Time Warner
Brands).
Time Warner, in general, believed that through the integration of traditional and new media and communication and business
technology the new company would be uniquely positioned in order to have a strong basis and take full advantage of the digital
revolution. From Time Warners view this strategic advantage emerged from multiple brands, vast array of content, extensive
infrastructure and strong distribution capabilities and that therefore the value of AOL Time Warner combined will be higher than the
value of the single companies. Time Warner regarded AOLs extensive Internet infrastructure as a new distribution medium for its
brands and content. Also Time Warner believed its broadband system was an ideal distribution platform for AOLs interactive services.
Furthermore, AOLs e-commerce system was regarded to be an opportunity to promote Time Warners music labels. Linking Time
Warners established brands with AOLs interactive services promised opportunities for subscriber growth. Finally, the Time Warner
board thought that through the merger the international position of the brand would be strengthened as well as the benefit for
consumers increased.3
2
3
Proposed Valuation
The hype surrounding the AOL and Time Warner merger was fueled by and in turn helped to refuel the growing internet bubble. Wall
Street analysts, internet gurus, and media moguls all hoped that this newly formed company would successfully integrate traditional
forms of media with the new. A valuation of these two companies was complicated and unprecedented. This was the largest corporate
merger to date and no one knew for certain what types of synergies and growth rates would be possible for the two companies.
Under the assumptions of a 25% supernormal growth rate and a 5% terminal period growth rate the valuation of the company was
over $93 per share (Exhibits 7, 8, and 17). While these growth rates were reasonable in the context of the environment of the late
1990s their sustainability was never questioned. Many questions remained unanswered. Could AOL continue to grow subscriptions
and advertising revenues? Could AOL take advantage of Time Warners extensive cable network (if so what would this cost and how
long before it materialized)? Could two large behemoths merge together? Was it AOL saving Time Warner or vice versa? The
sensitivity tables attempts to answer some of these questions with technical analysis and try to judge their impact upon the share price
of the newly formed firm (Exhibits 7-17). It is clear that the growth assumed in 2000 never occurred. A more realistic supernormal
growth rate for the two companies would have judged their synergies to deliver 5-7% growth for the short term.
10
4
Knowledge@Wharton. Giving Up on AOL Time Warner. March 2, 2003. http://news.com.com/2009-1069990592.html?tag=fd_nc_1.
5
AOL Time Warner: A Merger Gone Wrong?.
file:///c:/Documents/MBA/Classes/Current/M&A/AOL%20TimeWarner/Internet%20Files/Case.htm.
6
Kane, Margaret. Case resigns as AOL chairman. ZDNet News. January 13, 2003. http://news.zdnet.com/2100-9595_22980284.html?tag=nl
7
Scott-Joynt, Jeremy. What Myspace means to Murdoch. BBC News. Tuesday, 19 July, 2005.
http://news.bbc.co.uk/1/hi/business/4697671.stm.
8
Knowledge@Wharton. Giving Up on AOL Time Warner. March 2, 2003. http://news.com.com/2009-1069990592.html?tag=fd_nc_1.
9
Hu, Jim. AOL slims to grow ZDNET News. December 3, 2004. http://news.zdnet.com/2100-9588_22-5476755.html?tag=nl
10
Hu, Jim. Case accepts blame for AOL-Time Warner debacle. ZDNet News. January 12, 2005. http://news.zdnet.com/21009588_22-5534519.html.
11
Knowledge@Wharton. Giving Up on AOL Time Warner. March 2, 2003. http://news.com.com/2009-1069990592.html?tag=fd_nc_1.
12
http://news.zdnet.com/2100-9588_22-5534519.html
13
Knowledge@Wharton. Giving Up on AOL Time Warner. March 2, 2003. http://news.com.com/2009-1069990592.html?tag=fd_nc_1.
14
Aa, Stephen. AOL-Time Warner: Myths and Facts. The MotleyFool. April 29, 2002.
http://www.fool.com/community/pod/2002/020429.htm.
11
A final reason for the failure is the fact that AOL and Time Warner were not able to encourage a climate within the companies to
initiate the synergies that were proposed. As Peter S. Fader, a Wharton marketing professor, says it is impossible to manufacture
synergies, oftentimes they are just nothing more than serendipities.15 A clear and concise strategy never emerged from the two
companies:
Wharton business and public policy professor Gerald Faulhaber has heard this spiel before. AOL is an enormous asset, but
it has a management problem, says Faulhaber. AOL has the audience, but Time Warner has demonstrated that it doesn't
know how to take advantage of it. There are plenty of unanswered questions about AOL, Faulhaber adds. For example,
what does AOL have to become in the future? What can AOL create that's unique? How can it garner profits from its
instant messaging dominance? How will it convince its customers to stick with AOL as broadband Internet access grows in
popularity?16
Even though there was hope for a complete integration of the companies and the ability of both companies to leverage the others
strengths, this never materialized. The integration of services which was editorialized by many cartoonists (Exhibit 3) never occurred.
15
Knowledge@Wharton. Giving Up on AOL Time Warner. March 2, 2003. http://news.com.com/2009-1069990592.html?tag=fd_nc_1.
16
Knowledge@Wharton. AOL: In Search of a New Strategy. Nov 11, 2005.
file:///c:/Documents/MBA/Classes/Current/M&A/AOL%20TimeWarner/Internet%20Files/Future%20Strategy.htm.
12
Appendix
Exhibit 1: Time Warner History17
17
Who Owns What: Time Warner Corporate Timeline. CJR Americas Premier Media Monitor, Columbia Journalism Review.
http://www.cjr.org/tools/owners/timewarner-timeline.asp.
13
18
14
15
Exhibit 5: Adjusted Closing Share Price and Daily Trade Volume TWX19
450,000,000
100
90
400,000,000
80
350,000,000
70
60
250,000,000
50
200,000,000
Volume
300,000,000
40
150,000,000
30
100,000,000
20
50,000,000
10
Mar-06
Mar-05
Mar-04
Mar-03
Volume
Mar-02
Mar-00
Adj. Close*
Mar-01
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
0
Mar-92
Operating Margin
19
Value / Share
%
Change
20%
66.03
-30%
22%
72.95
-22%
24%
79.87
-15%
26%
86.79
-7%
28%
93.71
0%
30%
100.63
7%
32%
107.55
15%
34%
114.47
22%
36%
121.39
30%
16
Value / Share
% Change
5%
17.93
-81%
10%
28.07
-70%
15%
42.75
-54%
20%
63.81
-32%
25%
93.71
0%
30%
135.70
45%
35%
194.06
107%
40%
274.38
193%
45%
383.83
310%
Value / Share
% Change
1%
66.89
-29%
2%
71.58
-24%
3%
77.32
-17%
4%
84.49
-10%
5%
93.71
0%
6%
106.00
13%
7%
123.21
31%
8%
149.03
59%
9%
192.06
105%
Value / Share
% Change
1%
85.59
-9%
2%
87.22
-7%
3%
88.84
-5%
4%
90.46
-3%
5%
92.09
-2%
6%
93.71
7%
95.33
2%
8%
96.95
3%
9%
98.58
5%
10%
100.20
7%
17
Value / Share
% Change
0%
89.66
-4%
0.5%
91.68
-2%
1.0%
93.71
0%
1.5%
95.73
2%
2.0%
97.76
4%
2.5%
99.78
6%
3.0%
101.81
9%
Exhibit 11: Sensitivity Analysis for Supernormal Growth Period Working Capital Expenditures
Supernormal Growth
Period Working
Capital Expenditures
Value / Share
% Change
0.0%
96.95
3%
0.5%
96.14
3%
1.0%
95.33
2%
1.5%
94.52
1%
2.0%
93.71
0%
2.5%
92.90
-1%
3.0%
92.09
-2%
3.5%
91.27
-3%
Exhibit 12: Sensitivity Analysis for Terminal Period Working Capital Expenditures
Terminal Period
Working Capital
Expenditures
Value / Share
% Change
0%
93.71
0%
0.5%
91.68
-2%
1.0%
89.66
-4%
1.5%
87.64
-6%
2.0%
85.61
-9%
18
Exhibit 13: Sensitivity Analysis for Supernormal Growth Period Capital Expenditures
Supernormal Growth
Period Capital
Expenditures
Value / Share
% Change
0.0%
98.58
5%
0.5%
97.77
4%
1.0%
96.95
3%
1.5%
96.14
3%
2.0%
95.33
2%
2.5%
94.52
1%
3.0%
93.71
0%
3.5%
92.90
-1%
4.0%
92.09
-2%
4.5%
91.27
-3%
5.0%
90.46
-3%
Value / Share
% Change
0%
97.7576687
4%
0.5%
95.73332635
2%
1.0%
93.70898399
0%
1.5%
91.68464164
-2%
2.0%
89.66029929
-4%
Supernormal Growth
Period Cost of Capital
Value / Share
% Change
2%
191.40
104%
4%
159.20
70%
6%
132.93
42%
8%
111.41
19%
10%
93.71
0%
12%
79.08
-16%
14%
66.95
-29%
16%
56.85
-39%
18%
48.40
-48%
20%
41.31
-56%
19
Terminal Period
Cost of Capital
Value / Share
% Change
2%
-136.796132
-246%
4%
-459.5032943
-590%
6%
508.6181927
443%
8%
185.9110304
98%
10%
121.3695979
30%
12%
93.70898399
0%
14%
78.34197626
-16%
16%
68.56297134
-27%
18%
61.79289101
-34%
20%
56.82816544
-39%
20
Exhibit 17: Sensitivity Analysis for Terminal Period Growth Rate versus Supernormal Growth Period Growth Rate
Terminal Period Growth Rate
0%
1%
2%
0%
7.69
8.11
1%
8.53
8.99
2%
9.43
9.94
3%
10.40
4%
11.44
5%
12.55
6%
7%
8%
9%
3%
4%
5%
6%
7%
8%
$
16.93
9%
$
21.55
10%
8.62
9.23
10.00
10.99
12.31
14.16
30.79
9.55
10.23
11.08
12.17
13.63
15.67
18.74
23.84
34.05
10.56
11.31
12.25
13.45
15.06
17.31
20.69
26.32
37.59
10.96
11.64
12.47
13.50
14.83
16.61
19.09
22.81
29.02
41.44
12.06
12.80
13.72
14.86
16.32
18.27
21.01
25.11
31.95
45.63
13.24
14.06
15.06
16.32
17.93
20.08
23.09
27.60
35.13
50.18
13.75
14.50
15.41
16.51
17.89
19.66
22.03
25.34
30.30
38.57
55.12
15.04
15.87
16.86
18.07
19.59
21.53
24.13
27.76
33.22
42.31
60.48
16.43
17.33
18.42
19.75
21.41
23.55
26.40
30.39
36.37
46.35
66.30
17.91
18.91
20.10
21.56
23.38
25.72
28.85
33.22
39.79
50.72
72.60
10%
19.51
20.60
21.90
23.50
25.50
28.07
31.49
36.28
43.47
55.46
79.42
11%
21.22
22.41
23.84
25.59
27.78
30.59
34.34
39.58
47.46
60.57
86.81
12%
23.06
24.36
25.92
27.84
30.23
33.30
37.40
43.14
51.75
66.10
94.80
13%
25.02
26.45
28.16
30.25
32.87
36.23
40.71
46.98
56.39
72.07
103.44
14%
27.14
28.69
30.56
32.85
35.70
39.37
44.26
51.12
61.39
78.52
112.78
21%
46.79
49.62
53.01
57.15
62.33
69.00
77.88
90.31
108.96
140.04
202.20
22%
50.44
53.51
57.19
61.69
67.32
74.55
84.19
97.69
117.94
151.69
219.18
23%
54.35
57.68
61.67
66.55
72.66
80.50
90.97
105.61
127.58
164.20
237.44
24%
58.52
62.13
66.46
71.75
78.37
86.88
98.22
114.11
137.93
177.64
257.05
25%
62.97
66.89
71.58
77.32
84.49
93.71
106.00
123.21
149.03
192.06
278.11
30%
90.20
95.99
102.94
111.43
122.05
135.70
153.89
179.37
217.59
281.28
408.66
31%
96.78
103.04
110.54
119.71
131.17
145.90
165.55
193.05
234.31
303.08
440.60
32%
103.80
110.55
118.64
128.53
140.90
156.80
178.00
207.68
252.19
326.39
474.79
33%
111.27
118.55
127.28
137.95
151.28
168.43
191.29
223.29
271.30
351.31
511.34
34%
119.23
127.07
136.48
147.98
162.35
180.83
205.47
239.97
291.71
377.95
550.42
35%
127.71
136.15
146.29
158.67
174.16
194.06
220.60
257.76
313.50
406.39
592.18
Works Cited
Aa, Stephen. AOL-Time Warner: Myths and Facts. The MotleyFool. April 29, 2002.
http://www.fool.com/community/pod/2002/020429.htm.
The AOL/Time Warner Merger, Part One. pp. 223 230.
AOL Time Warner: A Merger Gone Wrong?.
file:///c:/Documents/MBA/Classes/Current/M&A/AOL%20TimeWarner/Internet%20Files/Case.htm.
Historical Prices. Yahoo Finance. http://finance.yahoo.com/q/hp?s=TWX.
Hu, Jim. AOL slims to grow ZDNET News. December 3, 2004. http://news.zdnet.com/2100-9588_22-5476755.html?tag=nl
Hu, Jim. Case accepts blame for AOL-Time Warner debacle. ZDNet News. January 12, 2005. http://news.zdnet.com/2100-9588_225534519.html.
Kane, Margaret. Case resigns as AOL chairman. ZDNet News. January 13, 2003. http://news.zdnet.com/2100-9595_22980284.html?tag=nl.
Knowledge@Wharton. Giving Up on AOL Time Warner. March 2, 2003. http://news.com.com/2009-1069990592.html?tag=fd_nc_1.
Knowledge@Wharton. AOL: In Search of a New Strategy. Nov 11, 2005.
file:///c:/Documents/MBA/Classes/Current/M&A/AOL%20TimeWarner/Internet%20Files/Future%20Strategy.htm.
Press Releases, News Room. TimeWarner. Jan 10,2000. http://www.timewarner.com/corp/newsroom/pr/0,20812,667602,00.html.
Rosenberg , Scott. AOL and Time Warner's marriage of insecurity. Salon.com Technology. Jan 10, 2000.
http://archive.salon.com/tech/col/rose/2000/01/10/aol_time/index.html.
Scott-Joynt, Jeremy. What Myspace means to Murdoch. BBC News. Tuesday, 19 July, 2005.
http://news.bbc.co.uk/1/hi/business/4697671.stm.
Who Owns What: Time Warner Corporate Timeline. CJR Americas Premier Media Monitor, Columbia Journalism Review.
http://www.cjr.org/tools/owners/timewarner-timeline.asp.
Who We Are: Leadership. Innovation. Commitment to Members. AOL.com. http://www.corp.aol.com/whoweare/history.shtml.