Magoosh GRE

The financial and operational consequences of a merger: AOL and Time Warner

| April 6, 2015



During the economic downturn in 2008 and 2009, companies pile on cash as it was considered the safe option due to the continuous decline in stock and equities. After the downturn, with all the cash on hand combined with a record low interest and lending rates, companies started to look for deals. Although stock prices increase with the economic rebound, market values of companies are still relatively low. This has made corporate takeovers and mergers financially attractive for corporations. With low valuations, mergers and buyouts make economic sense as well, for companies looking to create cost savings and competitive benefits from synergies. Companies are also looking to acquisitions for expansions and higher growth, rather than organic growth. Due to this corporate mergers and acquisition (M&A) activity made a huge comeback in 2010 (The Investment Blogger 2011). In the first half of 2011, the trend continues to rise and there are now major takeover deals occurring on a regular basis, across all market sectors and industries.

Not only have the number of deals significantly increase, the size of the deals is also large in size with most deals valued between $1 billion to $10 billion, and a few valued more than $10 billion. This trend is expected to continue to 2012 (The Investment Blogger 2011). Some of these deals are as below.

• Sanofi-Aventis SA and Genzyme Corporation agreed in February 2011 on a takeover agreement of $20.1 billion in cash.

• Vivendi SA took over Vodafone Group’s 44% stake in France’s mobile phone operator SFR for $11.31 billion in April 2011.

• Texas Instruments took over National Semiconductor for $6.5 billion.

• Microsoft Corp took over Skype for $8.5 billion.
• Johnson & Johnson purchased Swiss medical device maker Synthes Inc. for $21.3 billion.

• DuPont acquired Danisco, a global enzyme and specialty food ingredients company, for $5.8 billion.

• LVMH Moet Hennessy Louis Vuitton SA acquired Bvlgari SpA for $5.2 billion.


Time Warner is born out of the merger of Time and Warner Brothers in 1989. Warner Brothers was a motion picture and recording company, and Time a publishing house. Together Time Warner was a multi-media company, covering areas such as record labels, motion picture, television production and distribution, book and magazine publishing. In 1996 it acquired Turner Broadcasting System, which makes Time Warner the second largest cable television network, with powerful brand names such as HBO, Time Inc., CNN and Warner Bros. under one roof.

American Online Inc. (AOL), on the other hand, provides Internet access to the masses, the leader in the online business, giving its users emails and easy to understand graphic user interface. AOL is also familiar with M&A through its acquisitions of niche technology companies. It shifted its focus from driving profitability and growth through subscriptions and usage time to advertising and e-commerce deals. AOL registered massive growth in stock price, with 1,468% increase from October 1996 to January 2001, when the S&P 500 only registered a 100% growth (Verma).

Both companies officially merged in 2000, during the height of excitement of the internet, hailed as the new media sector. It was believed that traditional and new media channels were converging into common platform and future media growth will be through this new media. The industry believed that companies operating only in one media channel will not survive or will have a diminished presence in the future.

The AOL Time Warner merger was hoped to form, in the words of their press release, “The world’s first fully integrated media and communications company for the internet century.” (Why AOL Time Warner Failed to Change the World, 2009) With the merger, Time Warner wanted to distribute its content through the new media, which is where a partnership with AOL, the leading internet player at the time, made sense. For Time Warner, building its own online channel would be too costly and too time consuming. AOL saw the merge as a way to expand their portfolio of brands, gaining access to the wealth of content that Time Warner has. AOL also believed that Time Warner will help its effort in building the next generation broadband through its existing cable systems. Prior to the merger, AOL was faced with increasing demand from the market to generate more advertising sales to meet expectations. AOL was not able to do this on its own, and the merger was a way to prevent a decline in stock valuation.

The combination of Time Warner’s broadband systems, media contents and subscriber base created significant synergies potential and strategic advantages with AOL’s online brand, internet infrastructure and its own subscriber base of 30 million. Growth potential was foreseen to come from new service and revenue opportunities and cross-marketing opportunities, while cost saving opportunities was expected to come from the combined marketing effort and cost reduction in launching and operating new technologies. With the scale the combined company has, they believed that they can leverage on its scale and scope of international presence and position to capitalise market opportunities.

When they merged in 2000, AOL was worth almost $200 billion and Time Warner was approximately $160 billion. It was considered the biggest merger in media history. The years since the merger have been rough. The internet bubble burst and the proposed synergies failed to materialize, caused by contributing factors such as the company’s failure to implement and communicate joint vision, failure to notice new trends in the digital industry and failure to capitalise on its first mover advantage. AOL Time Warner decided to part ways in 2009, after losing more than $300 billion of market value. In 2009 AOL had a market value of less than $2.5 billion, and Time Warner $36 billion (Quinn 2009).


This report will outline the financial and operational impact of merger and acquisition, combining theory with examples from the AOL Time Warner merger. In addition, the main reasons on why the AOL Time Warner merger failed will also be analysed.


The overall research approach is mainly through secondary research, with information gathered from website articles, research documents and other publications. Some information is also gathered through the primary source, i.e. the AOL and Time Warner websites, financial reports and publications.



Stock prices play an active role in affecting corporate M&A decisions; it is not merely a reflection of the firm’s value (Holmstrom & Kaplan, 2001). Even though the value consequences of market-driven acquisitions and the true motives behind such acquisitions are unclear, it is clear that performance of acquiring firms is not always improved as a result of the acquisition activities. The acquisition activities can even destroy shareholder value.

One research that is particularly relevant to AOL Time Warner is an investigation of the reasons why acquisitions can be value destroying, particularly when stock market valuation is high and corporate executives have more dubious motives for pursuing their acquisition decision ((Fung, Jo, & Tsai, 2009). The research highlighted the importance of CEOs in M&A activities and the interaction effect between stock market influences and managerial incentives. The interaction is particularly important as decision makers affect corporate behaviour and performance.

Market valuation also has a significant influence on M&A decisions, through decisions made by rational decision makers who used overpriced shares as cheap currency to make acquisitions with no synergy (Shleifer & Vishny, 2003). In this case, acquisitions are a form of arbitrage, driven by irrational stock market mispricing. This drives opportunities for M&A decisions that would not have been able to take place due to lack of financing. Decision makers who believes and defends the over valuation will use overvalued equity to make value destroying M&A decisions (Jensen, 2005), to expand their empire or boost short term stock prices to cater to the market expectations. The higher valuation increases discretion, raising the possibility of decision makers making poor decisions once they have exhausted all the good ones.

Merger waves normally occur during economic expansions, which may cause the mistake of over estimation of synergies (Lambrecht, 2004). An over optimistic estimation of synergies, both the value and time needed to realize them, is a common mistake done by companies in justifying for the M&A decisions. Most of the time the companies under estimate the time and effort it would take to realize the synergies and the cost associated with it.

Theories on how to make any M&A a successful one has been around for a long time, and it seems simple enough – assess the situation, make an action plan, implement the change, track performance and monitor progress. This involves, among others, M&A readiness on both sides, combined with proper preparation, sound and properly communicated integration plan, swift and concise issue management (Mauriello, 2011). However it is still very difficult to make it happen in practice. Most of the M&A activities have failed, through the years the outcome of various M&A activities has shown that it is more likely to fail than to succeed, with very few have actually lead to a more successful joint companies.

Integration is the most important, and the most difficult, phase of an M&A process, this is the phase where failure often occurs. The M&A process is multidimensional, including the integration of financial and operational aspects. Financial aspects include accounting systems and procedures, compliance with Sarbanes-Oxley Act (SOX) and measurement of synergies, and operational aspects include human resources, production, distribution system, planning system and corporate cultures. Integration covers all there areas and it is important for the decision makers to manage these factors well to help pave the path towards a successful integration. Post-merger or post-acquisition integration is an interactive and gradual process of strategic and administrative combination of both companies, where individuals of the two organizations learn to work together and cooperate in order to transfer strategic competencies.


The financial impact of an M&A will be analysed through the changes in the market, the impact of Wall Street’s expectation and various financial troubles encountered by AOL Time Warner, such as the decline in their stock price and market valuation, goodwill write off and other fine and lawsuits they encountered.

The most significant operational impact of an M&A is change – dealing and managing change. The most well-known theory on change management is The 8-Step Process for Leading Change by John Kotter, a Harvard Business School professor and world-renowned change expert. He introduced the change process in his 1995 book titled “Leading Change”. After 30 years of research on why organizations fail to make change happen, and he concluded that is it because companies often to not take holistic approach required to see change through. A summary of his theory is outlined below (Kotter, 2011).

Step 1: Establishing a Sense of Urgency
This step is about making others see the need for change and the importance of acting immediately. Many senior managers underestimate the difficulty in making people change their daily routine, getting them out of their comfort zone. They also sometime overestimate the success they have achieved. Kotter suggests that for change to be successful, 75% of a company’s management needs to “buy into” the change.

Step 2: Creating the Guiding Coalition
No one person can handle the end-to-end activities in implementing change. Putting together a group of people with enough power to lead the change. It is important for this group to comprise of the right people, a combination of senior management and managers, with a significant credibility, power, expertise, leadership, level of trust and shared objective.

Step 3: Developing a Change Vision
A clear vision simplifies decisions, motivates people to take actions toward the right direction and helps to coordinate actions of people in a fast and efficient way. To be effective, a vision must take into consideration the current realities of the company and also set ambitious but achieveable goals. It has to be imaginable, desirable, feasible, focused, flexible and communicable. A vision, combined with a credible strategy on how to achieve them, will convince all employees that it is not merely a lofty ambition.

Step 4: Communicating the Vision for Buy-in
The vision has to be communicated as often as possible, with mentions in all aspects of employees’ daily activities. It is important to keep the communication simple, vivid, repeatable and invitational. As actions speak louder than words, it is crucial that the guiding coalition leads by example. Every member of the team has to embodies the change they aim to achieve, sending powerful message to the entire company.

Step 5: Empowering Broad-based Action
This step includes identifying obstacles to success and removing the obstacles. The major obstacles are structures (i.e. unsuitable company structure to deliver the vision), skills (i.e. employees do not have the necessary skill sets to deliver the vision), systems (i.e lack of infrastructure to deliver the vision) and supervisors (i.e. troublesome supervisors who undermine the effort or not performing the required duties to create change). It is important to identify and empower change leaders to deliver the change and remove any obstacles and reward employees that help make change happen.

Step 6: Generating Short-term Wins
Short-term wins, between 6 to 18 months, are essential to increase the sense of urgency and to ensure the overall change initiative’s success. The success of meeting the short-term wins give employees confidence and boost morale and motivation through the reward of seeing their effort and sacrifices pay off. If successfully met the short-term wins also effective in undermining cynics and people who are resistant to change, turning neutral people into supporters and reluctant supporters into active helper. In order to achieve this, it is important that the short-term wins to be visible, unambiguous and clearly related to the change effort.

Step 7: Never Letting Up
Giving up before the change is complete can be detrimental as momentum can be lost and regression may soon follow. Once regression begins, rebuilding momentum is a very difficult task. Leadership is crucial in this step, instead of declaring early victory, leaders should launch more projects to drive change deeper into the organization and take the time to ensure that all new practices are grounded in the organization’s culture.

Step 8: Incorporating Changes into the Culture
New behaviours must be driven into the culture to ensure long-term success. Leaders must be able to prove that the new way is better than the old. Success must be visible and well communicated. There also has to be a connection between reinforcing new way with employees incentives and rewards, including promotions.


The research was conducted over the internet, into databases such as EBSCO and ProQuest and also news and articles available on the web. EBSCO covers journals such as Academy of Management Journal, British Journal of Management and Journal of Business & Management. ProQuest covers business journals, trade magazines and news sources, such as International Journal of Management, MIT Sloan Management Review and Risk Management. Key business magazines and news titles such as The Economist, Business Week, Fortune, Financial Times and Wall Street Journal are also covered in ProQuest.

The field of mergers and acquisitions are extremely large and extensive papers have been published on the topic. To stay in line with the topic of this report, the research was focused on materials relating to the financial and operational impact of mergers and acquisitions, both in general and specifically relating to the merger of AOL and Time Warner, between 2000, the year of the merge, and 2011.


First-hand information on the merger is difficult to obtain, as the merge happened in 2000. Financial report and news releases at the time of the merge is no longer available on AOL and Time Warner websites, hence the research relies heavily on secondary research materials.

There are no ethical issues that arose during the information gathering.


The merger of AOL and Time Warner has been judged to be a merger between two companies in fear. AOL feared that its business model needed continual adaptation to a changing internet and wanted to ensure broadband access. AOL needed to continue its growth by acquisition strategy in order to justify its high market capitalization. Time Warner feared that its out-dated network of traditional media outlets (television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift. Time Warner believed that for it to remain competitive it needed an immediate injection into the internet.

But mergers out of fear are rarely successful. The valuation that analysts predicted (above $90 per share) never persisted as the two companies have not been able to fully integrate. AOL and Time Warner have not been able to formulate a strategy which can help the combined company move forward, the managers have failed to win the support of all divisions, and the dynamics and technologies of the internet have changed and have left AOL behind.

In the 1990s technology boom, the market also awarded companies for meeting their short-term goals. As AOL’s results have shown, it is good for the stock price, to be focused on meeting Wall Street’s short-term expectations. This short-term management caused the company to lose sight of its market strategy. Due to this, it failed to see changes in the industry brought by young players such as Yahoo and Google, and it also lost focus on quality of its online service.

The stock market can serve as a double-edged sword in corporate M&A, since market mispricing could create opportunities for M&A projects which would not otherwise be financed, whilst it can also distort M&A decisions and present incentives for managerial self-interest. The negative impact of market-driven M&A on the performance of acquiring firms is more significant for M&As which are financed by stocks, executed with high premiums and undertaken during periods of high market valuation (Fung, Jo, & Tsai, 2009). Managerial overconfidence and hubris may affect these M&A characteristics whilst also undermining long-term performance. During periods of intense M&A activities where high M&A premiums are less scrutinized, managers make poor M&A decisions that do not add value to the firm, but, instead, enable managers to empire build.

This is certainly true with AOL Time Warner merger. 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. Since, however, AOL according to its stock price was worth as much as Time Warner at the time of the merger they got the same voting rights and power.

Even though Gerald Levin of Time Warner was the CEO and Stephen Case of AOL was the Chairman of the Board, the merger was intended to be a “merger of equals”, with each company getting eight members on the board and a shared COO position. However considering the market valuation and share prices at the end of 1999, AOL was worth 65% of the combined company to Time Warner’s 35%. AOL was worth almost double Time Warner, even though Time Warner was generating $27 billion in revenue vs. AOL’s $5 billion. Due to the difference in market valuation, the companies agreed on a 55% split to AOL and 45% to Time Warner.

During the 1990 many upcoming Internet start-ups, the so-called dotcoms, were tremendously overvalued and to some extent without ever having made profit worth as much as established blue-chip companies because investors believed in their potential. When the bubble burst, many of the over-hyped internet companies experienced a significant decline in share price or disappeared altogether. For example, in 1999 Amazon was one of the internet darlings. Its share price had soared from $1.5 in 1998 to over $100 by 2000 (Holway, 2011). After the dotcoms bust, Amazon was severely affected too, and its share price plunged to $8 by 2002. Only a few companies survived the “new economy”-era and are now established companies, Amazon is one of them.

After the bubble burst, AOL is certainly less worth than Time Warner. From this perspective AOL received too high a price for its share or Time Warner paid too much for what it received in return. The stock price of AOL Time Warner fell from its peak of almost $90 in 2001 down to almost $10 in 2003. Also, since AOL turned out to be an unequal partner AOL Time Warner changed its name back to just Time Warner and almost the whole AOL board has been replaced while still many of Time Warner’s directors are in charge.

In any merger and acquisition situation, both companies are affected by changes during the integration process, by retaining the important resources, the transfer of resources between the companies and by eliminating the redundant resources. And in the integration phase, the problems may occur due to human factors, cultural incompatibility and an inappropriate management of the integration process. The subsequent sections will go into more details on the financial and operational consequences of an M&A, linking business theories, where applicable, with examples from the AOL Time Warner merger.


The hype surrounding the AOL and Time Warner merger was fueled by and in turn helped to refuel the growing internet bubble. Wall Street analysts, internet gurus, and media moguls all hoped that this newly formed company would successfully integrate traditional forms of media with the new. A valuation of these two companies was complicated and unprecedented. This was the largest corporate merger to date and no one knew for certain what types of synergies and growth rates would be possible for the two companies.

Under the assumptions of a 25% supernormal growth rate and a 5% terminal period growth rate the valuation of the company was over $93 per share (Verma). While these growth rates were reasonable in the context of the environment of the late 1990s their sustainability was never questioned. Many questions remained unanswered. Could AOL continue to grow subscriptions and advertising revenues? Could AOL take advantage of Time Warner’s extensive cable network (if so what would this cost and how long before it materialized)? Could two large behemoths merge together? Was it AOL saving Time Warner or vice versa? It is clear that the growth assumed in 2000 never occurred. A more realistic supernormal growth rate for the two companies would have judged their synergies to deliver 5-7% growth for the short term.

AOL was found doctoring its advertising revenue by pre-booking revenue and overvaluing advertising contracts. Fines paid to the SEC for this accounting improprieties topped $300 million. AOL Time Warner also spent $3 billion to settle civil class action suits and in 2002 the company suffered a historic $99 billion write-down in goodwill and disclosed a bad agreement with Bertelsmann AG that required AOL to buy back AOL Europe (a joint venture between AOL and Bertelsmann) at a grossly inflated price (Bodie, 2006).

The company could do the massive $99 billion write-down in goodwill due to an accounting rule change in 2002, allowing companies to take a charge for the difference between fair value and recorded value, including goodwill, all at once (Colvin, 2002). Under the old rule, the differences had to be amortized over a period of up to 40 years. The new role had the effect of making companies look much healthier than they actually are, as once they took the big one-time loss, they could report a much better profits in the next quarter. The charge-out also took out a big chunk of capital off the balance sheet, which made the company’s return on capital to improve.

AOL focused its efforts almost entirely on the stock price and believed that they had a moral obligation to maximize shareholder value. Time Warner, on the other hand, had a culture that placed the institution above the shareholder, and journalism ethics above any requirement to make short-term profits. The resulting culture clash is immense. AOL, in its efforts to boost share price, aggresively set and then met quarterly earnings targets throughout the late 1990s. Executives cared little about accounting proprieties or long term client relationships. The focus was solely on performing up to Wall Street’s expectations. This sole focus on shareholder and share price led AOL to mislead investors and neglect its core business. While AOL went into the merger thinking its aggressive culture was going to transform underperforming Time Warner, ultimately AOL executives burned themselves out, leaving the merged company almost entirely in the hands of Time Warner management.

Gerald Levin believed that with him at the top and half of the board controlled by Time Warner directors, the merger was a “merger of equal”, even with 65-35 split instead of a 50-50 split. Due to this belief, he decided not to seek a “collar”, a contractual stipulation that the merger’s terms would be recalculated if either stock falls below a certain price before the merger’s consummation (Bodie, 2006). He believed that a collar would signal uncertainty and doubt in the merger and the joint vision that led to it. Unfortunately, the lack of a collar would lead Time Warner shareholders to suffer enormous losses in the year between the merger’s announcement and its closure.


In line with creating urgency, the senior management ought to examine market and competitive realities and create an open discussion to identify and discuss crises, potential crises or major opportunities. If a lot of people start talking about the proposed change, the urgency will build and feed itself.

AOL and Time Warner failed to carry out this step. Even back in 2002, AOL business model was out-dated. AOL did not realize that it was able to remain popular due to its reputation and user-friendly interface. Internet access was becoming cheaper by the day as new providers popped up. At the end of 2002, it was clear that high-speed internet was going to be the way to be in the future, and users were getting more comfortable using search engines such as Yahoo and Google. AOL had few unique qualities left and the company did not realize this change in the industry.

On the other hand, Time Warner’s failure was strategic. It did not have the foresight to see that the power of the internet would be as transformative as it has been and that access to it would become ubiquitous. In hindsight, this seems incredibly ironic, considering that gaining internet expertise is exactly what Time Warner hoped to accomplish with the merger. But it grossly overvalued the staying power of a potential partner whose business model was not better than its competitors – but merely the one that came first.

In addition to the competitive realities, the market also took a tumble. Only two months after the merge, the tech market took its first major hit and never recovered, and AOL was in serious trouble. The bubble was bursting and over the next couple of years a lot of those young hopefuls who’d abandoned steady jobs or bet their house on the dotcom dream would have a rude awakening. On April 14th 2009, the Nasdaq index of hi-tech shares fell by 10%, leaving it 35% down from its peak a few weeks earlier in March (Why AOL Time Warner Failed to Change the World, 2009).


In order to form the team, the senior management needs to identify the true leaders within the organization. These people need to be influential, either through their job title, status, expertise or political importance. Once the key people are identified, make sure they covers various departments and levels of the company. The next step is to get their commitment and work on team building.

After the merge, AOL employees were in charge of much of the company, holding critical positions such as CFO, and controlled operations over growth areas of the new company. As AOL was controlling the team, they brought with them their culture of aggresiveness, focused on delivering shareholder value. Time Warner employees are used to placing the company above the shareholder, and journalism ethics above any requirement to make short-term profits. Due to their cultural differences, many at AOL thought their Time Warner counterparts as lazy and unfocused. The senior management failed to see this and did not take appropriate actions to stem the problem at its root.

Furthermore, the CEOs at the time of the merger, Stephen Case and Gerald Levin, regard themselves as being the wrong persons to do the job at that time. Case stated that not only him but also the whole board of directors in each of the companies really believed in the success of his idea; yet he admits that he was the one to blame for the failure since it was his idea. Indeed at that time AOL needed Time Warner’s broadband and cable business as a strong partner for further growth. In contrast, it is a question whether Time Warner really needed AOL or whether a strategic partnership would not have been the better choice.


Senior management needs to capture what they “see” as the future of the organization and create a strategy to execute the vision. As mentioned in the earlier section, the vision has to be imaginable, desirable, feasible, focused, flexible and communicable (Mind Tools). It is important that the member of the guiding coalition can communicate the vision in a short and effective way, helping the employees of all levels to easily grasp the concept and remember what they are suppose to achieve.

In the time after the merger AOL and Time Warner failed to implement their visions and communicate them – e.g. marketing Time Warner content through all channels possible or expanding AOL broadband service through Time Warner’s infrastructure. They lacked the ability to recognize new trends in the digital industry. One trend apart from broadband Internet was Internet telephony or Voice over IP (VoIP). AOL Time Warner as the main player in the digital revolution – as they defined themselves – hardly took notice of this trend and they failed to build a business model for that.

They were also not able to promote their idea of a combined music-platform. It was another company to gain the first mover advantage in this area (Apple with their introduction of the iTunes Music Store). Another main trend that AOL Time Warner missed was the importance of highly personalized web services. AOL Time Warner in contrast believed that delivering serious news and facts was more promising than highly personalized content.

AOL used to be the most important Internet Service Provider in many countries. However, they failed to offer broadband access as soon as possible. So it was the local phone companies to have the first mover advantage. As a consequence of this not only lost AOL subscribers to their Internet service but also their portal lost importance leading to a loss in opportunity to promote AOL Time Warner content. As a further consequence income from advertising is decreasing.

To communicate the vision, senior management and the guiding coalition needs to use all medium available to talk about the change vision, apply the change vision to all elements of activities and lead by example. Inviting employees’ to give feedback and addressing their concerns are also crucial.

A merger or acquisition may challenge employees’ job motivation and upset their career plans through various resistance generating changes (Maden, 2011). In addition, experienced loss of identity resulting from the transformation of corporate cultures affects the job performance of individuals negatively.

Senior management should understand the major employee concerns during and/or after M&A and pay attention to them. Lack of timely and accurate information creates uncertainty on the side of the employees and in line with the rumours and real experiences of layoffs, their motivation to work towards success decreases. Should termination of employees is necessary, the basis of it should be justifiable and the company should provide compensation to the dismissed employee. Changes in positions and autonomy and responsibility levels, and changes in the amounts of pay and benefits are the most critical personnel decisions that affect the moods and performances of retained employees.

In order to reduce prevalent employee stress, managers should provide both timely and honest information to their employees rather than the false promises that will just validate or invalidate rumours. In addition, they should act as a buffer between the organization and dismissed employees and ease the detachment process of these individuals.


One of the biggest obstacles to achieve change was AOL and Time Warner difference company culture. The company faced many of the cultural differences that all mergers must overcome (Wade, 2010). Because it was a marriage between conventional and new-age companies, the differences were pronounced, and management struggled to reach mutual decisions. Neither side seemed to properly understand the other’s operations.

Time Warner is a company that stresses the importance of company traditions of journalistic integrity and excellence, to the extent that it triumphs over any commitment it has to its shareholders. Time Warner believed in the importance of long term values and relationships. Getting the best deal might become secondary if it meant cutting ties with a valued customer or supplier. This was completely the opposite of AOL’s focus to always get the most money possible at any given point in time. AOL organised itself to facilitate its ever-increasing stock price. In adapting itself to the expectations of the market, AOL has placed short-term profitability and stock price at the forefront of everything they do. The merger of these two companies is a classic case of culture clash, a clash which was initially won by AOL, but eventually won by Time Warner.

In the former Time Warner, the company was organized around its divisions, with division performance being the crucial measurement of success. As a result of this, the divisions competed with one another even if it meant that the company overall lost some of the benefits of synergy. AOL, on the other hand, believed in the value of synergy and looked at the company’s overall share price as the ultimate goal.

Another reason for the failure of the merger 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. It is impossible to manufacture synergies; oftentimes they are just nothing more than serendipities. A clear and concise strategy never emerged from the two companies.

The company also has an odd entrepreneurial culture, while entrepreneurship is highly prized; the executives who run the big operating units still prefer the safety and comfort of a large corporation to the risk of running one’s own business. And that creates an environment where divisions do not cooperate with each other and synergy becomes a bad word.


Nothing motivates better than success. Give the employees a taste of victory early in the change process, through short-term targets that are achievable, with little room for failure. With each successful completion of the targets, and a reward for employees who give great contribution toward meeting the targets, employees’ motivation will increase.

After the merge, Gerald Levin and the AOL executives thought they can implant the target-focused culture of AOL to Time Warner and immediately bring up the stock up in price. As part of this culture implant, Levin got rid of the Time Warner employee cash bonus plan in exchange for AOL’s employee stock option plan (Bodie, 2006). Previously, Time Warner employees were awarded for meeting or beating internal goals and incentives. At AOL, employees were rewarded with stock to better align their interest with the shareholders. As the internet bubble burst, the stock price began to drop, the former Time Warner employees’ view of the plan begun to deteriorate and so were their feelings towards the merge.

While linking performance measurement with shareholder value makes sense to encourage employees to think like shareholders, it is important to set reasonable targets. Like any goals, targets can drive employees to work harder to meet a tangible measure of achievement. However, AOL was known to be incredibly ambitious in setting their targets, which encourage employees and executives to cheat, if necessary, to meet or beat the targets. When hard work was not enough, AOL relied on techniques such as backdating contracts, moving revenue forward, moving revenue back and adjusting its advertising revenues as required. This is definitely questionable, and it was clear from the SEC fines that AOL went against the rules.

The focus on maximizing shareholder value can also be misappropriated to maximizing the share price at the time of the executives’ options was vesting.


Kotter argues that many change projects fail because victory is declared too early. Once leaders see the quick wins, they stop improving, preventing the organization to achieve long-term change. Continuous improvement is crucial, analyzing areas to improve even after a win and set goals to continue building the momentum achieved. Leaders can also keep ideas fresh by bringing in new change agents into the guiding coalition.

AOL Time Warner did not really experienced any wins, they missed its 2001 goals by a mile, due to the economic downturn, compounded by the September 11 attack, and CEO Gerald Levin changed after this. He began to resist the AOL way of working, suddenly uninterested in the share price and the company’s shareholders, and reverted back to the Time Warner’s culture of moral responsibility and relationships. Case was unhappy with this change and began an internal campaign to force Levin out.

The change in top management also did not yield any significant result. Levin left in December 2001, and he was replaced by a former Time Warner executive, which signalled the beginning of the end of AOL’s dominance within the company. The focus was then changed to building long term value, and not to over-promise the market. However this did not last long, as after the financial debacle in 2002, another change of senior management took place, and after a long period of being under fire, Stephen Case left in January 2003.


To make changes stick, it should become part of the company’s culture. It is important that the senior management, existing ones or any new leaders who are brought in, continues to support the change.

At the end of 2003, shareholders in AOL Time Warner had lost over $200 billion in equity value. 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.

There still exists much controversy around Case’s profit taking from the sale of his shares. The fact that Case sold a major part of his AOL stock soon after the merger was announced in January 2000 (when the price of the stock was high) and made an estimated profit of $ 160 million evoked suspicion and anger among shareholders. They thought that Case was aware of the fate of the merger and accused him of making money, when the time was right, at the expense of the shareholders.


Merging AOL with Time Warner in 2000 could have and should have been a brilliant move, not just for Stephen Case, who made zillions by converting high-flying internet stock (and a bit of fuzzy accounting) into real money, but for the world’s biggest media company too (Quittner, 2009). By the turn of the century, it had become apparent that the value of content was plummeting as more and more media were digitized. Time Warner’s video, music and print, and especially its cable company, could have and should have rallied around AOL as the solution. AOL and Time Warner Cable’s high-speed internet arm, Roadrunner, could have and should have merged, making AOL, that once golden brand name, synonymous with a national broadband network.

And as that network grew and grew, Time Warner’s content divisions, from HBO to Time Inc., from CNN to Warner Bros., could have and should have been at the forefront of the digital-media revolution, leveraging that access against its powerful brands. But all these could not put AOL Time Warner together again. Even though there was hope for a complete integration of the companies and the ability of both companies to leverage the other’s strengths, this never materialized.

After years of troubles and changes, in 2003 even the name of the company was changed, what started out as AOL Time Warner was reduced to Time Warner. The board members elected to drop the “AOL” as if to purge the stigma (Bodie, 2006).The company’s stock symbil changed from “AOL” back to “TWX”.

So in the end, Time Warner turned out to be the worst kind of conglomerate. In fact, it was Stephen Case who saw this coming, when he argued in public in early 2004 that AOL ought to be spun off. The separation was enacted by way of a share split, with Time Warner shareholders getting one AOL share for every 11 Time Warner shares held (Quinn, 2009). AOL will continue to operate its existing internet connection business, however will largely focus on its growing content business which includes a host of blogs and news sites.

Both companies seem to be doing fine separately. Currently AOL stock price is at $14.65, with market capitalization of $1.57 billion (Google, 2011) . Time Warner is at $35.47, with market capitalization of $37.06 billion (Google, 2011).

As part of the pending separation, AOL has unveiled its new corporate logo, ditching the letters “AOL” on a right-pointing arrow, in favour of “Aol” on a variety of colourful backgrounds. Tim Armstrong, AOL’s chairman and chief executive, has been restructuring the company to focus on its new challenges, hiring 150 journalists as part of its content push. However that restructuring continues, and with it plans released three weeks ago to axe around one-third of AOL’s 6,900-strong workforce. Meanwhile, Time Warner, which has been spinning off non-core assets for the past two years, will focus on its content businesses which include its struggling Time magazine division and its television and film businesses.

At the end, it appeared that Time Warner triumphed in the end, with its culture of long-term relationship and journalistic integrity. Culture means much more than control. It is an approach, a methodology, a way of doing business. Time Warner has demonstrated this and it has emerged the better company of the two. From the example of these two companies, it shows the importance of having a corporate culture, beyond simply focused on maximizing shareholder value. AOL lost its way from wanting to change the world through technology to solely focusing on shareholder value. This shows that the company itself, its culture, its people and its purpose, does matter. Higher share price should be a by-product of a successful company, not the end goal.


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