It was supposed to be the "merger of the
century." There were $106 billion reasons to believe in success. It turned out to be a heist. The crumbling empire can be heard in the distance -- falling stock prices, market capitalization and market share are only a few of the smaller problems that AOL-Time Warner is currently stomaching. Its largest problem is that the AOL-Time Warner merger is a colossal failure. Just over three years ago, America Online swapped its overvalued, hefty stock for the Time Warner kingdom. Both companies have suffered ever since. I believe that the merger should never have happened; the merger is a failure and -- ultimately -- the two companies should de-merge and become independent.
The merger should never have happened because the reasons for wanting to merge did not make sense. The purpose of the merger was to become a media juggernaut that would dominate the Internet as well as traditional media sources. When the merger was announced, the cast of characters -- Chairman Steve Case, CEO Gerald Levin and (probably against his will) Vice Chairman Ted Turner -- praised the prospective "synergies" that would be a result of the merger.
Just because both companies share certain common areas of business -- such as managing and supplying content -- does not mean they should have merged. Bigger does not mean better. Most people at the Tuck School of Business would tell you that companies ought to stick to their core competencies and do what they do best. AOL was an Internet Service Provider. Time Warner was a media giant. Two plus two was supposed to equal four or even five, but someone used the subtraction sign instead of the addition sign. The result: negative profits and negative synergies.
The merger was a rushed marriage. Both Chairmen -- AOL's Steve Case and Time Warner's Gerald Levin -- were too anxious to merge. They wanted to merge for reasons that do not justify merging two corporate behemoths. Chairman of Liberty Mutual John Malone said that Steve Case was ready to merge with any company that had "hard assets and liquidity." AOL wanted to ally itself with a "solid company." Gerald Levin, on the other hand, was guided by his desire to be considered a visionary a la the likes of Ted Turner or Bill Gates.
Malone says of Levin, "This was Gerry's personal decision, maybe his personal Waterloo." Malone continues, "I mean who did Napoleon talk to before he invaded Russia? I'm sure Napoleon was looking at it and saying, 'Boy, I can make history big time if I pull this off,' you know?" Other companies thought better of merging with AOL. Viacom's Chairman Sumner Redstone said of the deal, "I rejected it because it made no sense to me. I felt their currency was inflated. I didn't laugh, I didn't cry. I would be crying now if I had done the deal."
The merger is a failure. Sure, it did not look like a failure at first, but there were obvious signs that the merger would not and could not work. The merger took place during the dot-com boom; over $1 trillion had been invested in companies that had not produced a dollar of profit. Now in the dot-gone era, AOL-Time Warner's bleeding has become even more apparent. Look at the company's debt: the combined company has a market capitalization of $64 billion, but a debt of $28 billion. AOL Time Warner lost (gulp) $100 billion in 2002, the largest ever in corporate history. The company even fell prey to Enronitis: smaller scale accounting problems bubbled within AOL. It had to write-off $40 billion to $60 billion in its 2001 annual report, the largest asset impairment write-off in corporate history.
The cast of characters is now "retired," or they "resigned." CEO Gerald Levin is gone. AOL's crown prince Bob Pittman is gone. In the last two weeks Chairman Steve Case was shown the exit. In probably its biggest blow, AOL's biggest shareholder, Ted Turner, said he would not be as much a part of the company. Mr. Turner has not been immune to the woeful circumstances. His holdings have fallen from $6.5 billion to $1.7 billion.
What should AOL-Time Warner do? I say de-merge. De-merging or "de-scrambling the eggs" is somewhat compelling. Each company could go its own way and take care of what should be its first priority: its customers. The customer usually loses in large-scale mergers and this merger is no exception. I cannot think of a single way in which I benefited from the merger as an AOL-Time Warner customer. My AOL bill went up, my baseball team's budget went down, my support of the company went down. What is more, the company has lost tons of credibility on Wall Street. A solution is needed.
My suggestion will probably not be taken because it is unrealistic and would be the ultimate recognition that the merger was a bad idea. One reason that de-merging would be a bad idea is that analysts put the stock price of the online unit of the company (AOL) at $2. That is, AOL might not be able to survive as an independent entity. Another difficulty would be how to divide up the debt. De-merging is doable but difficult. As is, AOL continues to be a leech on the Time Warner side of the business, as the internet component has become stale.
Aside from hiring famed business consultants Peter Drucker or Tom Peters to think of major reforms for the company, I say the company ought to find an appropriate leader. The current CEO, Robert Parsons, seems to be a peacemaker, but he is by no means a visionary. I say get Mr. Turner back. Nobody believed he could create a 24/7 television giant in CNN. Few people probably think he would fail at turning AOL around.
If you are reading this column and happen to be on AOL's board of directors, please consider this: empower Mr. Turner and make him your leader. Bring back the energy. Bring back the soul. Bring back the vision. Otherwise, the crumbling might accelerate.
