AOL & Time Warner Team-Up

Time Warner Warner Brothers ed in 1923 in Hollywood

In 1989, Warner Brothers merged with the publishing house Time to Time Warner . Time acquired Warner for $14 Billion Time Warner acquired Turner Broadcasting System in 1996  Could secure more than 20% of all expenses for print ment in 2000 in the US

America Online  AOL was founded in 1985 under the name Quantum Computer Systems.  AOL was the first on-line service requiring the use of proprietary software.  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.  Extremely rapid growth in the late 1990s.

Market Situation Prior Merger  AOL had 27 million subscribers.  Competing with the likes of Prodigy and the commented Compve into a media conglomerate.  Since 1996, it began its transformation from computer-networking company to media giant.  AOL's stock price increased 1,468% from October 1996 to January 2001.

AOL merged with Time Warner  On 10th JAN, the internet service company AOL & the media giant Time Warner.  In 2000, AOL purchased Time Warner for US$164 billion.  The Federal Trade Commission cleared the deal on December 14, 2000, and gave final approval on January 11, 2001.  Due to the larger market capitalization of AOL, they would own 55% of the new company while Time Warner shareholders owned only 45%.

Reason for Merger  For Warner, merging with an existing company was a more effective way.  Creating an own Internet branch would be both very costly and time intensive.  The combination of Time Warner's broadband systems, media contents and subscriber base would create significant synergies and strategic advantages with AOL’s online brand, Internet infrastructure and own subscriber base of 30 million customers.

 For AOL, the merger was about technology.

Contd…  AOL did not have a strategy for the next generation of internet s who would require broadband access.  For AOL’s Board of Directors, the portfolio of brands created with the merger of the two companies would cover the full spectrum of media entertainment and information.  AOL computer service’s technology and, over all, they assured that the new business would be benefited from huge operating synergies.

Transactions made since the AOLTime Warner merger  Wrestling was not in the network's best interest.  The fifty percent share in the cable channel Comedy Central was sold to Viacom.  AOL/Netscape's long running litigation against Microsoft was settled out of court.  On March 31, 2006 Time Warner sold the Time Warner Book Group to French publisher Hachette Livre, of the Lagardere group.  On February 23, 2006, Turner South, a regional sports and entertainment network in the south, was sold to News Corp's Fox Cable Networks group.

Contd…  On September 12, 2006, Time Inc. announced that Time4 Media, a group of men's interest magazines  In the summer of 2008, the Reader's Digest Association sold QSP to Time Warner subsidiary Time Inc. for $110 million.  March 2009, Time Warner Cable was divested from the company in a spinout.  On August 26, 2010, in Chile, Time Warner Company took the full control of Chilevisión, a channel owned by Chile's President Sebastián Piñera.

Proposed Valuation  The hype surrounding the AOL and Time Warner merger was fueled by and in turn helped to refuel the growing internet bubble.  A valuation of these two companies was complicated and unprecedented.  Assumptions of a 25% supernormal growth rate and a 5% terminal period growth rate the valuation of the company was over $93 per share.  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  A more realistic supernormal growth rate for the two companies would have judged their synergies to deliver 5-7% growth for the short term.

Proposed Synergies  When AOL and Time Warner announced their merger in 2000 they had a clear vision of their synergies.  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.  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.  AOL at that time was believed to have the necessary experience to help Time Warner transform their divisions to the digital channels.

Contd…  As most likely synergies of the merger the board of AOL regarded cost reductions and opportunities of growth  Efficiency increases were seen in marketing across different platform and distribution systems, cost synergies were likely to arise due to shared business functions  . From Time Warner’s 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.  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.

Reasons for Failure  One of the main reasons is that AOL basically never was an equal counterpart to Time Warner.  At the time of the merger AOL’s stocks were overvalued mainly due to the Internet bubble.  An estimated profit of $ 160 million evoked suspicion and anger among shareholders.  Another reason why the merger failed is that in the time after the merger AOL and Time Warner failed to implement their visions and communicate them.

Contd…  They even lacked the ability to recognize new trends in the digital industry.  The main trends AOL Time Warner missed was the importance of highly personalized web services.  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.