Aol Acquisition Of Time Warner

Mergers and acquisitions (M&A) is a big part of the corporate finance world. Everyday Wall Street investment bankers arrange M&A transactions bringing separate companies together to form larger ones often aiming to increase their long term profitability, achieve greater efficiency, accelerate growth process, expand the acquirer’s business in a faster period of time, vertically integrate, and other possible motives. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. However close to seventy-five percent of all M&A deals fail in their aim of adding value to the company. In the year 2000, the nation’s top Internet service provider America Online Inc. (AOL) announced to acquire the world’s top media corporation Time Warner Inc. in the largest deal in history worth $182 billion in stock and debt. With dominating positions in the music, publishing, news, entertainment, cable and Internet industries, the combined company, called AOL Time Warner was aiming to boast unrivaled assets among other media and online companies. While every organization is different and faces multiple challenges, AOL Time Warner did not prevail in the years to come, and plummeted the total value of its stock from $226 billion to $20 billion in an unsuccessful merger.

AOL executives sought to diversify the assets of the company beyond the Internet and online sectors. In addition, executives at AOL were quite concerned about the prospect of increased competition with Microsoft and sought to enlarge the company as a defensive measure. They also believed that the integration of AOL's Internet distribution and Time Warner's content would create a tremendous amount of value for both sides of the company. Time Warner executives saw the need to "digitize their business", they were also eager to be attached to an dot-com company, as the online bubble was near its peak. Additionally, AOL, which already had more than 30 million Internet subscribers, would gain access to Time Warner’s 13 million cable subscribers further reinforcing its position as the nation’s top online provider, and Time Warner would gain access to AOL customer database.

When the deal was approved, Time Warner shareholders received 1.5 shares of the new company for every share of Time Warner stock they owned. AOL shareholders received one share of the new company for every AOL share they held. The AOL Time Warner Company set to be owned 55 percent by AOL and 45 percent by Time Warner. The unification of AOL and Time Warner effectively combined old media power and content with new media software and networks. The combination was expected to immediately boast a market capitalization of $350 billion and annual revenue of $30 billion.

Economists saw the merger between AOL and Time Warner as mutually advantageous synergy that exists if the union of two business units allows for opportunities not available to each unit on its own. One specific type of synergy applicable to the AOL Time Warner merger is economies of scope. Economies of scope exist when the cost of doing something is lower when two units are joined rather than when they exist individually. For AOL Time Warner, the benefits caused by economies of scope, is the company’s newly acquired ability for cross-promotional marketing and bulk advertising buys. For example, Time Warner’s services, such as CNN.com can be heavily advertised on AOL’s Internet service, and more.

America Online acquired Time Warner in the largest deal in history in hopes of creating a digital media powerhouse with the potential to reach every American in one form or another. "Together, they represent an unprecedented powerhouse,” said Scott Ehrens, a media analyst with Bear Stearns in the year 2000. "If their mantra is content, this alliance is unbeatable. Now they have this great platform they can cross-fertilize with content and redistribute.” The AOL Time Warner merger was looked on as a threat to the business world. Media companies felt that the vertically integrated AOL Time Warner would unfairly promote its own content within its outlets. Consumer advocates were concerned with the threat of a possible attempt to corner the Internet-over-TV market, whereby AOL could force all of the Time Warner cable subscribers to use AOL branded Internet-TV.

Many observers were shocked that a large, diversified media conglomerate was being acquired by a much smaller company. Market conditions at the time of the merger placed a greater premium on Internet-related stocks than on traditional media stocks. AOL's high market capitalization relative to that of Time Warner made the acquisition possible. After the merger, the profitability of the AOL division decreased. Meanwhile, the market valuation of similar independent internet companies drastically fell. As a result, the value of the America Online division dropped significantly. This caused AOL Time Warner to report a loss of $99 billion in 2002, at the time, the largest loss ever reported by a company. The deal has since become widely regarded disaster, with a $2.4 billion shareholder settlement, a further $600 million set aside and a $5 billion price boosting share buyback program announced on August 3, 2005. In response to the huge loss in 2002, the company dropped the "AOL" from its name, and removed Steve Case as the executive chairman.

Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations. Although AOL has long been the clear leader of dial-up Internet service providers, it needed a strategy to position itself for the impending explosion of high-speed broadband access. AOL’s acquisition of Time Warner’s broadband systems did not give the firm a full capacity to provide high-speed Internet access to its customers because the cable system provided by Time Warner were geographically limited. The infrastructure of the cable network does not allow for easy expansion of coverage, therefore, this problem could not be easily fixed. Although AOL was no longer excluded from the sphere of broadband access, the firm could not attain immediate dominance in