Mr

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Hofstra University School of Law

Legal Studies Research Paper Series

Research Paper No. 05-21

AOL Time Warner and the

Matthew T. Bodie

False God of Shareholder Primacy

August 2005

AOL TIME WARNER AND THE FALSE GOD OF SHAREHOLDER PRIMACY

Matthew T. Bodie∗

The merger between America Online (AOL) and Time Warner is

almost universally regarded as a disaster.1 Announced at the beginning of

2000, the combination was heralded as ushering in a new era of Internet

dominance. After all, AOL – a company only fifteen years old – was taking a

majority stake in the merger with perhaps the preeminent entertainment and

media company of the era. AOL had bought Time Warner! If further proof of

the triumph of clicks over bricks had been necessary, the merger sealed the

deal.

But only two months later, the tech market took its first major hit and

never recovered. And at the end of 2003, shareholders in AOL Time Warner

had lost over $200 billion in equity value.2 By then the chief architects of the

deal – Time Warner’s Gerald Levin and AOL’s Stephen Case – had left the

company, along with most of the former AOL executives who had initially run

the combined company. Fines to the SEC for accounting improprieties topped

$300 million,3 $3 billion will be paid to settle civil class action suits,4 and in

2002 the company suffered a historic $99 billion write-down in good will.

Even the name was changed – starting out as AOL Time Warner, the

company’s board later elected to drop the “AOL,” as if to purge the stigma.5 It

∗ Associate Professor, Hofstra University School of Law. Many thanks to Larry Mitchell and

the participants at the Third Summer Retreat for the Sloan Program for the Study of Business

in Society for thoughtful comments on an earlier draft of this paper.

1 See, e.g., NINA MUNK, FOOLS RUSH IN: STEVE CASE, JERRY LEVIN, AND THE UNMAKING OF

AOL TIME WARNER (2004); KARA SWISHER, THERE MUST BE A PONY IN HERE SOMEWHERE:

THE AOL TIME WARNER DEBACLE AND THE QUEST FOR A DIGITAL FUTURE (2003).

2 MUNK, supra note 1, at 277.

3 Carrie Johnson, Time Warner, SEC Settle AOL Fraud Charges, WASH. POST, March 22,

2005, at E1, available at: http://www.washingtonpost.com/wp-dyn/articles/A53801-

2005Mar21.html.

4 Richard Siklos, Time Warner Offers $3 Billion to End AOL Hangover, N.Y. TIMES, August 4,

2005.

5 One professor has noted that the erasure of the AOL name, combined with all of the other

fallout from the merger, “reveal[s] a remarkable wipeout of the vision of the deal’s architects.”

Gretchen Morgenson, What Are Mergers Good For?, N.Y. TIMES, June 5, 2005, at 56, 58

(Magazine) (quoting Prof. Robert F. Bruner).

Draft: August 8, 2005

2

is no wonder that the merger has been called “catastrophic,”6 “the worst deal in

history,”7 and “the champion of all failed mergers.”8

A lot can be said about a deal this big with such widely recognized

fallout. However, little has been written about what it means for corporate

law. In my view, the cultures of the companies, both pre- and post-merger,

present a great opportunity to discuss what “shareholder primacy” actually

means in the context of corporate America. Although by no means universally

held, the consensus among prominent corporate law scholars is that the

corporation must be run to maximize shareholder value. This conclusion is so

strongly held that two preeminent scholars have declared that there is no room

for further debate on the subject.9 However, the notion of shareholder primacy

in practice is something that commentators have left largely unconsidered.

What exactly does it mean to run a company for the sole benefit of the

shareholders, and what effects would this have on the life of the company?

The AOL Time Warner merger offers a unique case study for the

examination of this question. As journalistic accounts from books and articles

about the merger demonstrate, the executives at AOL believed in the faith of

shareholder primacy. They focused their efforts almost entirely on the stock

price and believed they had a moral obligation to maximize shareholder value.

Time Warner, on the other hand, had a culture which placed the institution