1. Case: The Merger of AOL and Time Warner
The maturity on communications and internet technologies has spawn a new model of the economy, borderless economy. The jargon refers to the existence of cross-nations or even cross-continents trade, and commerce, which enable a company to offer service. In internet era, companies must realize that Web is naturally global – when a company launches a Web site, it is accessible by a worldwide audience.
In order to expand a company’s reach, executives at a company may take various policies such as exploring new market, developing new products and terminating unprofitable products, or conducting mergers and acquisitions to strengthen companies’ presence in a specific market.
Concerning mergers and acquisition, there is an interesting fact that according to the Securities Data Company, the value of U.S. (M&A) in 1996 alone reached a 27 percent increase to US$658.8 billion from US$518 billion in 1995.
1.2 Statement of the Problems and or Challenges (then & now)
The interesting part of the mega merger between AOL and Time Warner is whether the combined company can achieve the desired results as planned and what things that the new company needs improving in order to sustain in both internet and entertainment business not only in the U.S. but also in the whole world.
The two questions are valid since usually people, especially investors, love to see mergers happening in business because of the combined revenue and profits that the new company may have. In case of AOL, analysts reveal the merger will create a market capitalization of $350 billion and revenue up to $30 billion per annum (Johnson, 2000)
Concerning the attractive potential of becoming a powerful company and the possible threats that haunt the new company, in this paper, we will discuss some issues about America Online (AOL), which have merged with media giant, Time Warner, several years ago, in January 2000, to be precise. The discussion includes strategic planning, microenvironment Analysis, financial & Background Information, analysis of the Industry, SWOT analysis, and analysis of corporate objectives.
1.3 Internal Analysis
1.3.1 Mission Statement
Mission statement is a company’s declaration that exhibits what action a company will do in order o achieve the company’s goals. Considering the requirement of a good mission statement, (Answer Corporation, 2006) says that a mission statement should be understandable, to the point, and not being verbose since vague mission statement can lead to different interpretation. In addition, mission statement should clearly explain what will be done, who perform the action, for whom, and why.
Concerning AOL, in the company’s official website (www.aol.com), there is a company’s mission statement as following:
To build a global medium as central to people’s lives as the telephone or television…and even more valuable (AOL LLC, 2006 – Our Mission)
The company further reveals that this mission statement is the result of bottom-up approach since from the very beginning; the company has delivered services more than just making the Internet available to consumers. In fact, the company has showed the commitment to help consumers lives better in information era by providing them an online experience that helps, informs, and delights them.
The implementation of this mission statement is driving the company to continuously create attractive products such as Web properties like MapQuest andMoviefone and Netscape, unique channel navigation and an improved Search feature and the features that protect our members from spam, viruses, hackers and other dangers. Figure 1 shows the recent data of malicious ware protection and other AOL services that AOL provides to customers.
Figure 1 Data of AOL services
In regards to definition of mission statement as explained above, what AOL says about its mission statement, in general, lacks of the sentence determining why the mission is done so.
In addition, AOL does also not mention for whom and why the action is intended whether for delighting customers or satisfying investors/shareholders. Moreover, AOL’s mission statement is also short of the description about who does the action whether top managements or all employees of AOL.
1.3.2 Competitive Analysis & Rivalry Patterns
Evans and Wurster in the book, Blown to Bits, express their view concerning the current plethora of mergers and acquisitions (M&A) that involve intermediary companies like financial services and newspapers business. They further question the rise of electronic networks and the information revolution.
The authors of the book have great concerns on comparing the nature of information processing in two difference fashions: the new economy dealing with online news services as represented by AOL and the old one dealing with business that involves value chains, supply chain and many others as cast by Time Warner.
In the book, the authors worry about the coming of information era that possibly can smash up the old companies that still use intermediary supports. They describe this as melting glue in which information is the glue, which holds value chains and supply chains together. The so-called melting glue is the thing that we would not see in today’s online business since the vast availability of electronics connectivity has enabled open and almost cost-free exchange of a widening universe of rich information. This situation further makes communications channels that used to tie people together simply become obsolete. Overall, this condition refers to the threat of new economy.
This explanation of the threat of new economy in the book is not intentionally written for the case of AOL and Time Warner although it is applicable for the two companies due to the merger in 2000.
In case of the merger between AOL and Time Warner, the combined company poses and represents both new and old ways of doing information-processing business. Time Warner represents traditional business structures that involve value chains and supply chains while AOL is well-known as one of the best provider of online service.
The situation further generates questions as whether the combination of two companies, each representing new and old economy, will succeed due to potential clash that may exist in operational level of the combined company such as different managerial approach, culture, and industrial expertise.
1.3.3 Industry Attractiveness & Company Position
Search technology and portal is very attractive business since it is a multi-billion-dollar industry. The competition seems continue getting fiercer as large search company tries to acquire smaller one or to merge with another search company in other part of the world in order to be the next Google.
The wave of mergers and acquisition in international context between portal and search engine companies is also fierce when Yahoo proposed about $1 billion for a 40% stake in Chinese company Alibaba.com Corp and Google responds it by raising the offer into $4 billion (Richmond, 2005).
In addition, the race also happens in the Internet-telephony arena in which Microsoft decided to acquire Teleo Inc., Yahoo acquired Dialpad Communications Inc, AOL got Wildseed Ltd., while the search engine giant, Google, acquired Dodgeball.com.
Although the industry poses a threatening competition, but still AOL can cope with the challenge by using suitable strategies. After a long period of experiencing hard situation from the beginning of the merger to the departure of AOL Chairman Steve Case, we witness that AOL remains the leading media/communications conglomerate with a good future.
This condition highlights AOL to stands tall as the biggest player in the old and new media and communications market. The key success of the merger is strong beliefs that the merger will give benefits for the company’s future. Amidst investors are not happy with merger at the beginning, it does not mean that AOL lacks a glowing future.
There are several reasons and facts that support the beliefs that AOL Time Warner is still well positioned in today’s media industry:
AOL Time Warner properties still control the media industry with over 50 percent of all online advertising spending
Online advertising revenue continues increasing over years (see Table 1).
Deals with AT&T/Comcast and its own Time Warner Cable, AOL have then more than 50 percent of the cable modem market
1.3.4 Financial Information
Table 1 Financial Performance of AOL 2004-2005
The above table shows 4-5 years after merger between AOL and Time Warner, the new company has taken benefits as shown in the increasing revenue in 2005. According to AOL, the increase in advertising revenues is contributed by the high growth of AOL, Networks, and publishing segments in which Advertising.com, which AOL acquired in 2004, shows growth in the period.
1.4 SWOT Analysis
Strength is the first component of internal analysis, which describes any resources and capabilities that support a company to achieve its competitive advantage such as patents, excellent reputation, first mover image and many more.
Concerning the AOL Time Warner, the company’s strengths lie on their domination in the music, publishing, news, entertainment, cable and Internet industries since the combined company poses unrivaled assets among other media and online companies (Johnson, 2000).
The new company that combines the nation’s the nation’s top internet service provider (AOL) with the world’s top media conglomerate (Time Warner) will provide the new company a market capitalization of $350 billion and revenue stream of $30 billion per annum. Moreover, the combined company can share current customer databases in order to boost sales. Johnson (2000) reveals that currently AOL has over 20 million subscribers of AOL and Compuserve Internet services customers while Time Warner already has over 13 million cable subscribers.
In addition, PBS Online (2000) reveals that merger deal poses a potential pitfall for both of the companies. It is difficult to think of any companies that can challenge AOL Time Warner on the Internet and in entertainment businesses. This is because the merger generates a media inspiration that may be not possible to imitate.
The second internal factor is Weaknesses. This is simply in contrast to the strength in which the absence of specific strength might be considered as the weaknesses of the company. Concerning the AOL Time Warner, it is found that the bad culture of Time Warner could have serious impairment to AOL. Therefore, amidst the potential to reach revenue stream of $30 billion, AOL needs to modify its fast-changing culture.
Some analysts examine that the idea of a merger of these companies does not seem right. The problem of this case is demanding AOL to change Time Warner’s operating divisions into Internet-linked efficiency models with no wiping out the characters of the AOL, which have been made by the AOL chiefs. Previously, the CEO executives of AOL are working for a multibillion-dollar project. In contrast, Time Warner only has about a few thousands of employees that spread globally (Rose, 2000).
The first external factor in SWOT analysis is Opportunities. These elements provide specific opportunities that may help a company to gain more profit and achieve sustainable growth. They include unfulfilled customer needs, new technologies, and elimination of trade barriers and so on.
Opportunities for AOL Time Warner lie on the fact that the new company has launched management team that will lead the operations of the merged companies and eliminate problem that appears within the merger such as cultural clash between AOL and Time Warner.
For instances, AOL decides to take advantage of the media and communications opportunities. In addition, Pittman says that the new company will employ the best-united capabilities of the two companies while it combines Internet, media, and communications businesses (Pelline and Yamamoto, 2000).
To reach this objective, AOL Time Warner moves into the worldwide expansion by improving their supreme content, brands, and consumer relationships. In addition, AOL Time Warner also restructures payment services, promotion and selling, which become drivers of the company (“AOL Time Warner Merger”, 2001).
By performing the reorganization in the new AOL Time Warner, Pittman intends to make the management structure in the new company filled by the most competent peoples. To offer best service for their customers, AOL Time Warner are dedicated to present a wide choice of the best content while spreading their own content as extensively as possible (Pelline and Yamamoto, 2000).
In addition, Threats describe any changes in the external factors that may put any company in unsafe position in the market. They include a change in consumer tastes, new substitute products, new regulations and many more.
The potential threat for AOL Time Warner is the fact that according to Harvard Business Review (1998), out of 300 mergers conducted over a ten year period, 57% return to their shareholders with lower values. It is found that the largest obstacle of M&A (Mergers and Acquisitions) activity comes from cultural aspect. The study indicated that merged companies often fall shortly after the merger because the fail to combine different styles of managerial and operational activities. The failure to harmonize various corporate cultures can result in the lower employees and managements motivation, which lead to inefficiency and lower productivity (Di Giacomo & Associates, 2001)
1.5 Corporate Objectives of AOL Time Warner
Objectives are defined as exact form statement that is exactly formulated and provides specificity (“Strategic Planning”). Meanwhile the objective of AOL is as following:
Continue maintaining a net-to-Operating Income before Depreciation and Amortization ratio of approximately 3-to-1
To Purchase approximately $15 billion of its common stock under the program by the end of 2006, and the remainder in 2007
(Time Warner Inc, 2005)
The first statement of the company’s objectives lack of specificity since according to Lukaszewski (1990), objectives statement composes of five elements: task, what, who, timeframe and deadline. Therefore, the recommended objectives for AOL Time Warner should be:
Table 2 Objective Statement #1
Table 1 Recommended of Goals Statements #1
a net-to-Operating Income before Depreciation and Amortization ratio
of approximately 3-to-1
In the end of next fiscal year
AOL Time Warner, 2006
Unlike the above statement that lack of specificity, the second statement fulfills the criteria of being a good objective statements as shown in table 3.
Table 3 Recommended of Goals Statements #2
To Purchase approximately $15 billion of its common stock under the program by the end of 2006, and the remainder in 2007
approximately $15 billion of its common stock
of approximately 3-to-1
under the program by the end of 2006, and the remainder in 2007
AOL Time Warner, 2006
1.6 Evaluation of Strategic Alternatives
In Blown to Bits, the author reminds that a merger might create a potential pitfall since they think the new economics of information (online business) will blow all intermediary components to bits. Furthermore, the authors show their fear that situation will soon create obvious destruction and reformulation that release company’s value and increases productivity (Evans & Wurster).
Under such circumstances, Evans and Wurster suggest that any company that deal with the significant environmental change like happened in the news business to consider following points:
Examine the impact of informational economics on the whole industry
Pore over the potential benefit from new technologies in shifting existing structures
Analyze the possibility of value creation amidst changes
Lead the transition from the old model to the new one
Concerning the merger between AOL and Time Warner, we see that it is a strategic move to bring the company into a new formation that challenges the news industry. In my opinion, the merger is inline with the objectives of mergers as usual.
For Time Warner, while going online becomes one way to widen companies’ operation, mergers and acquisitions are other ways that many corporations take to fulfill the objective. Therefore, merger of AOL and Time Warner becomes a strategy tool for the combined company to reach good position in the news industry.
1.7 Evaluation & Control System & Contingency Plan
However, one research conducted by Grant Thornton Business Owners Council suggests that nearly half of all middle-market technology company fail in the merger and acquisition process due to some reasons as following (“”Primary Reasons”, 2001):
a) Poor integration strategies
b) Key employees leaving
c) Acquiring company did not do sufficient due diligence
d) Corporate culture clashes
e) Premium paid for the company was too high
f) Unrealistic expectations of possible synergies
Above reasons might be true for the combined AOL-Time Warner in which according to Johnson (2000), when America Online and Time Warner announced their merger, Wall Street shows reluctancy and hurts the company stock trading. In December 2000, for instances, AOL traded at $95.81, but as soon as the merger was announced, the AOL stock fell down into $72.63 and after two days later AOL sat at $60.06, meaning that the company has lost $29.1 billion in market capitalization. The reason Wall Street reacted on negative side is due to they fear of a slowdown in online advertising caused by the merger.
Fortunately, the company has also contingency plan to respond the market reaction by cooperating with high-powered investment bankers at Morgan Stanley Dean Witter and Salomon Smith Barney to break up this deal and prevent the plunging in the stock price (Johnson 2000).
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