In January 2000, the merger of Time-Warner and AOL went public. “Together, they represent an unprecedented powerhouse, said Scott Ehrens, a media analyst with Bear Stearns. “If their mantra is content, this alliance is unbeatable. Now they have this great platform they can cross-fertilize with content and redistribute.” Soon after, the combined $350 million entity shed value at a head-spinning rate, eventually earning a well-deserved reputation as the worst corporate merger of all time.
How did two well run, highly profitable organizations get it so wrong?
An Illusionary Advantage
Not all advantages are equal. Just ask MySpace.com, whose 70 million + user base in 2005 felt like an impenetrable hedge. That hedge, built on technology, was left unmaintained when purchased by News Corp in 2005. News Corp saw the opportunity to mine traffic for advertising dollars, rather than double-down on technology and fortify against the upstart Facebook. Not that MySpace had a particularly robust technology advantage for those who recall the mid-naughts.
AOL enjoyed a similar illusionary advantage. Around the turn of the century, AOL and its ubiquitous compact discs infiltrated every mailbox in the country. AOL provided only a utility (internet access), but by providing content and the thrill of online chat and message boards to nascent websurfers. In 1999, AOL’s market share of dial-up internet access registered at 12x the closest competitor.
Would that advantage last? In 1999, only half the country had internet access. The majority of users surfed with dial-up and only a fraction used the much faster broadband. The looming specter of broadband colored AOL’s 1999 business planning. By the end of the year, whispers of a new broadband age morphed to roars. While fighting the specter of broadband, AOL had another battlefront of concern. The AOL business model of providing gated content soon would undergo a huge test from the swiftly increasing entrants to the internet. Quality content and a technology hedge would provide an advantage to fight off future entrants. That’s why on paper, the AOL-Time Warner deal looked like a match made in heaven.
Steering from the Backseat
Steve Case, as CEO of AOl saw the Times-Warner as an opportunity to solve his broadband problem as a great opportunity to step into broadband. So he picked up the phone and called Jerry Levin, the CEO of Times Warner. One of the first sentences from Steve’s mouth was offering the CEO position to Jerry. That initial step put the AOL in the backseat and outsourced navigation of a brand new internet frontier to a 77-year old entrenched media company.
Deliberation sinks many a company. Great CEOs make decisions earlier, faster, and with greater decisiveness than their peers. The speed of the merger met that measurement, but the new structure and subsequent decision making lagged far behind best practices. AOL’s swing for the fences philosophy put it at a valuation of over $200 billion. The structure of Times Warner was a portfolio of independently operating companies – Times, HBO, and Warner Music to name a few. As such, AOL wasn’t merging with a single company, but a litany of companies. Yet, the slow decision making of the old Time-Warner company wasn’t just the product of bureaucracy. The issues ran much deeper.
As Jerry Levin and Steve Case negotiated the merger, key AOL and Time Warner executives were deliberately excluded. The tactic ensured the utmost secrecy but led to division presidents being blindsided by the news. Furthermore, the AOL deal was cast as a merger of equals, whereas a quick glance at the paperwork shows this was false. AOL, the higher valued company, was acquiring Time-Warner, an unsettling proposition for many long-tenured media types.
Part of the merger’s key terms was cutting $1 billion of costs across the new combined entity. Lay-offs crush morale, and right out of the gate employees were asked to do more with less. Two months later, the dot com bubble burst, decimating the retirement plans of Time Warner employees already furious by the acquisition. The bad blood underscored a gaping perception gap in what the internet would one day become. Times Warner and AOL executives had wildly convergent views and the hard times only entrenched each party furhter.
Lack of Risk Management
A detailed strategic plan or risk mitigation plan never surfaced in the initial Lovin-Case discussions. Even a quick, back of the envelope risk management plan would have quickly illuminated the risk of vastly different cultures, lack of buy-in from top leadership, and illusionary advantages.
It is doubtful that a well thought out risk management plan would have prevented the merger. However, it would have informed a better, more thoughtful path moving forward.
What Can We Learn
It’s easy to look at the AOL Time-Warner deal and skewer it as terrible. Yet, the possibilities truly were exciting but weren’t examined rationally. The merger would have had a fighting chance with a better plan, buy-in, and an appropriate understanding of culture.
Make a Plan
Jerry Levin and Steve Case’s vision of a combined superpower melted under the stress of a weak plan and no contingencies. As Mike Tyson says, “Everyone has a plan until they get hit in the mouth.” A robust merger proposition should have included a risk mitigation plan with action owners signed off by all responsible parties. Instead, a plan mainly sustained on hype with no contingency planning took its place.
The lack of attempt to gain buy-in from Times-Warner executives perhaps was one of the most damning issues with the merger. This held true especially true because of the Times-Warner business structure. Each president had profit and loss responsibility. To have zero say in the biggest strategic decision of the company’s history left a bad feeling for most executives, whether explicitly stated or not.
I hired an electrical drafter who, mid-interview, claimed a genius-level IQ of 152. I didn’t necessarily buy his claim but made the hire because his outsized confidence made me think great things were possible. Flash forward two months and those audacious claims morphed into delusions of “I’m discussing with the Board of Directors as to whether we should give raises.” That hiring mistake could have been avoided had I held steady to a key principle of my team, “Humble, helpful, and hard-working.” Recognization of cultural issues appeared at the onset of the AOL – Times Warner merger. Cultivating and planning for a combined culture would have set up the new entity for success.
Call to Action
It’s tempting to package up the AOL-Times Warner disaster as an aberration or a mistake that “really big companies make”. While it’s true that few mistakes reach the grand scale of the AOL meltdown, but lessons for today’s business owners are plentiful. Is the plan “punch in the face” durable? Are the right folks working on the right things? Is there a consistent and healthy culture across every department? Is that culture really the one that our organization collectively desires?
Your employees, your revenue, and your future depend on the right answers to these questions.