1. AOL TIME WARNER MERGER
CASE ANALYSIS
STRATEGIC MANAGEMENT OF
TECHNOLOGY
NILE UNIVERSITY, MSC. MOT
APRIL 2012
By: Ahmed Abuiliazeed and Al-Motaz Bellah Al-
April 2012 Agamawi

2. Overview- AOL
 First established in 1983 and in 1985 named
Quantum Computer
 In 1991 the company renamed America Online
 In 1992 the company went public in NASDAQ
 Share price increased 50000% in two years

3. Overview- Time Warner
 Time Warner, is a result of merger in 1989 worth $14 Billion between
 Time, established in 1922
 Main business is magazine publishing
 Followed by cable television in late 70s by acquiring American
televesion and communication company.
 Warner Brothers
 Established in 1923
 Main Business is film production
 Followed by music production and cable television operator
business in the 60s

4. AOL Time Warner
 In Jan 2001, it had been announced the
Merger between AOL and Time Warner
 The Merger aimed to
 “Create the world’s first fully integrated media and
communication company for the internet century
in an all stock combination valued at $350
Billion”

5. AOL Time Warner
The Deal of the Century
Creating
The Global Media Powerhouse
Is it True?

6. Our Analysis Methodology
 Merger Deal Information
 Pre-Merger Analysis
 Post-Merger Analysis

7. Merger Deal Information
 The merger was structured as a stock swap
 Because of AOL‟s higher market
capitalization, its shareholders would own 55%
of the new company
 Company initially valued at $350 billion
 AOL Timer Warner was to trade under the
ticker AOL

8. Pre-Merger

9. Environmental Analysis
 The Rational Behind
 Each lacked assets crucial for competing in the
internet age and it seemed unlikely that either
would develop those resources quickly enough to
compete.
 AOL and Time Warner saw in the other
complementary strengths which suggested the
possibility of a mutually beneficial relationship

10. Environmental Analysis
 AOL
 Industry - Growth of substitutes: Competition for dial-up
access was increasing dramatically (Yahoo and MSN).
 Market - Rise of Broadband: With significantly faster data
transfer speeds than dial-up, broadband internet start to boom.
Large telephone companies benefited as early first movers.
While AOL had the brand and credibility to capitalize upon
growth of this area, it lacked the infrastructure.
 Economic Conditions - Tech Asset Bubble: At $175 billion, AOL
was among the most highly valued companies in the world by
market capitalization, despite its lack of profitability, modest
revenue of $5 billion, and relatively small workforce of 15,000
employees.

11. Environmental Analysis
 Time Warner
 Time Warner, meanwhile, was much more
conservatively valued at $90 billion, far more
profitable upon $27 billion in revenue, and had nearly
70,000 employees.
 AOL seemed like the answer to Time Warner’s digital
prayers: access to a fast growing market, millions of
customers for its media content, and a proven internet
brand to leverage its broadband business.

12. Environmental Analysis
 Conclusion
 AOL: Increased competition for its core business and
the demise of dial-up posed existential threats to its
business model. The decision to merge with a durable
and profitable company with tangible assets, at the
peak of AOL‟s capital value, was the right strategic
decision.
 Time Warner: Benefit from having access to the
digital era through integrating with the largest

13. Leadership Strategy Analysis
 Control – Accountability: Leadership did not
exercise enough organizational control and authority
did not flow down the control pyramid enough to
create employee accountability.
 Strategy Drift: Leadership failed to deliver Time
Warner’s significant film, publishing and music assets
to AOL‟s massive subscriber base.
 Personality Conflict and Lack of Personnel
Development: Steve Case remained personally at
odds with Time Warner executives which crippled
plans to establish an online empire.

14. Leadership Strategy Analysis

15. Organization Culture Strategy
Analysis

16. Structure Strategy Analysis
 Overly Politicized Executive Positioning: AOL’s greater capital
value gave it substantial control over the placement of executives.
 Divisional Autonomy: Time Warner had twice failed to monetize
the distribution of its content over the internet, mostly because the
company‟s structure ceded autonomy to divisional heads who were
reluctant to share the premium content necessary make internet
ventures viable
 Structural Incongruities: The organizational differences between
the two companies led to significant structural incongruities. As a
result, AOL never exhibited the attributes of a typical Time Warner
company, making it difficult to establish a single corporate identity
and foster collaboration.

17. Organization Structure
 14 of the 22 corporate
executive was
representing AOL
 AOL executives
assumed two-thirds of
high ranking executive
positions post-
merger, despite coming
from the smaller
operational entity.

18. Merger SWOT Analysis
Strength Weaknesses
• AOL Brand Name • Clash of Culture- between both companies shareholders and
• Customer Base senior management
• TW media and entertainment experience • Management failed to execute its strategy
• TW Cable Infrastructure • Lack of Motivation
Opportunities Threats
• Second phase of interne usage (rich media • Local phone companies having first mover advantage in
content, music download, personalized portals, social delivering broadband
media, VoIP,…)
• Tech bubble and companies cuting Ads spending
• Marketing TW content available to AOL premium
customer • Competition from amazon, ebay, google and yahoo
• Leveraging TW cable to provide broadband access to
AOL customers

19. Post-Merger

20. Stock Market Reaction
 Both Shares Dropped After the Announcement:
 Investors bad past experience
 Valuation problem due to different nature of
businesses between two companies
 Changing the investor base due to different nature of
investor culture between two companies
 Expectation of TW Advertisement revenue decline
 Internet bubble effect of AOL

21. Regulatory Body Demands
FDC – Federal Trade Commission FCC- Federal Comm. Commission European Union
Open cable system to 3 rivals Instant messaging interoperability TM drope it JV plan with EMI
Refrain sabotaging content from rival ISP choice, present interfering customer AOL to dedtach German mediat giant
internet and interactive TV firms choice over ISPs Bertelsmann from the JV in AOL Europe
and CompuServe in France.
Continue promoting AOL high speed First Screen, allow rival ISPs to control first
service over DSL phone lines screen
Billing, grant direct billing relation for ISP &
Customers
Performance Quality, AOL to provide non
affiliated ISP same quality as Affiliated
Relation with AT&T, AT&T to divest 25%
stake in TM. Can not offer AOL Warner any
exclusive access to its cabling system
Other
inlude, Investment, Disclosure, Enforcemen

22. Unrealistic Valuation
 It was just because AOL is an Internet based company and
TW is an blue ship company
 AOL, modest revenue of $5 billion, and relatively small
workforce of 15,000 employees. Valuated to be $175 billion due
to the tech Asset bubble
 Time Warner, far more profitable upon $27 billion in revenue, and
had nearly 70,000 employees. Valuated to be only $90 billion
 Even before the ink from the merger could dry, complications
began to surface. AOL was accused (rightly) of manipulating
its accounting records to favorably distort its financial picture.

23. Business Model
 Customers unwilling to pay add-on
subscription fee
 Protecting IP on the internet was an issue
 AOL can not benefit from Time Warner cabling
infrastructure due to high required investment
required to enabling data send/receive
methods.

24. Management Commitment
 AOL hijacking the management due to its
share % although it is the small operation
entity.
 Leadingto TW management team non
cooperative behavior.
 Complete integration of the companies and the
ability of both companies to leverage the
others strengths, this never materialized.

25. The Agency Problem
 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.

26. Failure in Implementing Strategy
 AOL and Time Warner failed to implement their
visions and communicate them –
 marketing Time Warner content through all channels
possible.
 AOL to benefit from TW caballing infrastructure
 Customer Base, cross selling
 AOL and Time Warner were not able to encourage
a climate within the companies to initiate the
synergies that were proposed.

27. Failure to Recognize Trends and
Manage Change
 Voice over IP (VoIP).
 AOL Time Warner as the main player in the digital revolution – hardly
took notice of this trend and they failed to build a business model for
that.
 Combined Music Platform
 Again, it was another company to gain the first mover advantage in this
area (Apple with their introduction of the iTunes Music Store).
 High Personalized Web Services (SN)
 Examples are MySpace.com, a platform for everyone to express
oneself, which was bought by Rupert Murdoch’s News Corp.
 They failed to offer broadband access as soon as possible. So it
was the local phone companies to have the first mover advantage

28. Conclusion
 While both companies had assets coveted by the
other, the decision to merge was, under all the
circumstances, flawed, and AOL and Time Warner
should have never carried through with their
plans.
 Oftentimes, companies can accomplish their
competitive goals through licensing agreements
and joint ventures

29. Where Do you think AOL
Time Warner Stand As of
today April 2012?

30. THANK YOU
IT WILL BE MY PLEASURE IF YOU CAN CHECK THE FOLLOWING URL TO HAVE A LOOK ON MY
PERSONAL PERSPECTIVE ABOUT M&A IN TECHNOLOGY BASED FIRMS
http://www.slideshare.net/magamawi/mergers-and-acquisitions-why-and-why-not-with-a-focus-on-
hightech-industry

31. Widescreen Test Pattern (16:9)
Aspect Ratio
Test
(Should appear
circular)
4x3
16x9