AOL-TIME WARNER MERGER
AOL-Time Warner Merger
On January 11, 2001 America Online and Time Warner alloyed to anatomy AOL Time Warner. As the better alliance in accumulated history it created the world's arch media and ball company, whose businesses accommodate alternate services, cable systems, filmed entertainment, television networks, music and publishing. (www.aoltimewarner.com) The alliance was beheld as the advancing calm of old media with new, and was believed to accept astronomic accessory potential.
Synergy can broadly be authentic by as: 2 + 2 = 5. That is, the sum of the genitalia are greater than the whole. Synergies can appear from a cardinal of sources, which I analyze in the abutting section. These accommodate beneath exploited economies of ambit and scale, synergies that appear from bargain internalized transaction costs, and banking synergies. I go on to altercate how did basic bazaar pressures, artefact bazaar challenges and weaknesses in amount competencies appulse on the abortion of the accumulation to accomplish actor amount from the merger. Then, in the final area I discuss, with advertence to empiric affirmation and the appearance of administration and commentators alike, whether AOL Time Warner's alliance has failed.
Reasons for merger
It is acutely axiomatic from AOL Time Warners 2000 anniversary address administration ambition was to accretion synergies from the alliance "our alloy of cable brands in publishing, cable television, cable programming and agenda alternate services gives us amazing opportunities for cross-promotion.” (The Economist Oct 26, 2002) In 2000, for example, AOL began bringing in added than 100,000 subscriptions per ages to Time Inc. magazines, and the magazines were acclimated to administer AOL's new 6.0 disks for advertisers, creating new kinds of chip bales that acquiesce them to adeptness audiences with an intimacy, appulse and adeptness never afore possible. All-around Amplification - they are additionally focused on opportunities for all-around expansion. Alliance apparent as a way to capitalize on the accession of information, communications and ball industries as customer appeal added choice, ascendancy and convenience.
Were synergies Not the Aim of the Merger?
Mergers and alternative about-face strategies are not consistently pursued for the corruption of synergies. Firms may absorb in acclimation to abate actor and administration risk, or because of management's claimed objectives. In affairs Time Warner application their awfully aggrandized allotment amount AOL acquired actual assets of an accustomed and badly acknowledged firm. Cynics altercate that the alliance was alone a way for the firm’s shareholding administration to accompany their own objectives and get affluent quick. Not atomic because anon afterwards the merger, back the allotment amount was far college than it is today, 14 admiral accomplished $256m, including the new CEO Mr. Parsons ($35m) and the above CEO Mr. Case ($50m). (The Economist Oct 26, 2002)
Furthermore affirmation suggests that top management's salaries and authority are activated with accumulated admeasurement rather than accumulated profitability. A abstraction by Hayward and Hambrick (1997) adds to the altercation that administration may accept alloyed for their own claimed affidavit pointing to the affair of administration hubris. This is area administration accept "exaggerated pride or cocky confidence, generally constant in retribution" and so accept they can accomplish added than is absolutely the case.
Conglomerate and accumbent mergers may additionally be pursued so as to abate actor accident by ensuring acquirement flows from a cardinal of altered sources. However, I do not accept that this was the motive abaft the AOL Time Warner merger. It is broadly accepted that if shareholders appetite to abate their accident by diversifying they can accomplish it at a far lower amount than can a close (less transaction cost) by accession their portfolio or advance in a alternate fund.
Nevertheless AOL and Time Warner may accept alloyed so as to abate the accident acknowledgment of its management. Accustomed that cyclicality in accumulation levels is accompanying to cyclicality in employment, provided advisers are communicable amid abstracted businesses of the firm, their may be allowances to administration from the added assortment of the close - as it has added adeptness to bland achievement fluctuations. (Grant 1998, 363-86) In the 2000 anniversary address Case and Levin (2001) wrote that they had a "fundamental focus on acting apace to apprehend the allowances of cross-promotion and accumulated infrastructures". It is comments such as these that advance me to accept that the acceptance motive abaft the alliance of AOL and Time Warner was to accomplishment synergies. In the abutting area I altercate whether they accept succeeded.
Have they bootless to accretion synergies?
On the face of it AOL Time Warner appears not to accept acquired any synergies. The allotment amount has plummeted back they completed the alliance by added than 60%, (Singhania 2003) they reportedly fabricated almanac losses in 2002 (Howe 2003), and abundant of their above administration has larboard or is about to. Some altercate that Time Warner is actuality abject bottomward by AOL, which is adversity from abbreviating announcement revenues and slowing subscriber growth.
Management aboveboard admits that so far the alliance has not accomplished expectations and abounding feel that, like so abounding others afore it, the alliance has failed. Scholars who altercate amassed mergers like this would point to theories (which I cannot prove in this case) that advance that, because of access amount and allurement furnishings (Besanko et al. 2000), such about-face after-effects in inefficient ability allocation amid the divisions. They altercate that the firms would accept been added able if they had remained absolute accepting to attempt in the bazaar to accommodate their corresponding administration and agreeable capabilities.
On the alternative hand, there are arguments to advance that AOL Time Warner has been the victim of an adverse bread-and-butter climate, and that their disability to accomplishment synergies accept not been absolutely proven. Firstly, as apparent below, the abatement in AOL Time Warner's allotment amount is beneath than that of agnate companies, such as Yahoo (The Economist Oct 26, 2002), and is larg?ly in lin? with th? NASDAQ tr?nd. (B?for? th? m?rg?r AOL was list?d on th? NASDAQ)
Factors such as th? slowing all-around ?conomy, S?pt?mb?r 11th, th? alpha of th? dot com bubbl?, ?nron, and r?c?nt accounting sp?culation ov?r th? form?r AOL hav? all r?duc?d shar?hold?r confid?nc?, and ar? not n?c?ssarily to do with poor ?xploitation of m?rg?r syn?rgi?s. Furth?rmor? a abundant admeasurement of AOL Tim? Warn?r's r?v?nu?s ar? g?n?rat?d from onlin? adv?rtising, th?s? hav? d?cr?as?d, but larg?ly in lin? with absolute sp?nding on onlin? adv?rtising which has d?cr?as?d from approximat?ly $8.2 billion in 2000 to approximat?ly $6.3 billion in 2002. (Financial Tim?s 2003) In accession abounding of th? p?rc?iv?d syn?rgi?s of th? m?rg?r hav? b??n ?at?n abroad by th? ill?gal downloading of music and blur from th? Int?rn?t.
?mpirical ?vid?nc? from th? 2001 anniversary r?port sugg?sts that syn?rgi?s ar? b?ing r?aliz?d. R?v?nu?s incr?as?d from $14,733 actor in 2000 to $16,543 actor in 2001, ?arnings b?for? int?r?st d?pr?ciation and acquittal (?BITDA) hav? incr?as?d from $8,394 actor to $9,996 million. (Wolf 2002) Furth?rmor?, in accessible at l?ast, manag?m?nt boasts about th? syn?rgi?s th?y hav? r?aliz?d: "Our cross-promotions ar? alr?ady accepting impr?ssiv? r?sults. AOL continu?s to g?n?rat? about 100,000 Tim? Inc. subscriptions monthly." (Cas? ?t al. 2002)
I anticipate that th? m?rg?r has not fail?d and that th?y will and ar? ?xploiting syn?rgi?s. AOL is still th? world's (Lowry & H?nry 2002) Furth?rmor? syn?rgi?s will alone incr?as? as AOL ?xpands its accession of broadband, which will ?nabl? th?m to d?liv?r consum?rs ?v?n mor? of Tim? Warn?r's cont?nt. I b?li?v? AOL's found?r, St?v? Cas?, wh?n h? says: "Th? tru? valu? of this abutment li?s not in what it can do today, but what it will achi?v? in th? futur?." (CNN, 12 January 2003)
Many commentators accept that the alloyed firm's attempts to accretion synergies accept failed, and all accede that their achievement has been disappointing. However, I accept that this alliance was not a mistake, and that in acclimation for firms to abide aggressive they charge always change and redefine the business in which they operate. I accept AOL Time Warner's poor achievement has abundantly been alfresco of management's control, and is added a absorption of the difficult alien bread-and-butter environment. Mergers crave acclimation time, and AOL Time Warner may not yet accept exploited all the synergies that exist, but they are alpha to, and I accept will abide to in the longer-term.
The accommodation to 'Make' rather than 'Buy' was begin to be absolutely accompanying to the admeasurement of adjournment costs and abnormally associated with animal asset specificity and the actuality of bugged economies of calibration and ambit back the basic or assignment is internally procured. (Frank ; Love 2000) Over the years an absorbing cardinal of empiric studies accept been agitated out which access after-effects constant with the anticipation that asset specificity is the capital account of vertical cipher integration
Internal accretion of a basic may betoken above economies of calibration or ambit in production, which are accessible to an alien supplier. Lyons (1995, p. 432) argues: “It is argued that the assembly amount advantage of the bazaar declines as assets become added specific because it becomes more difficult to accumulated the altered demands of a cardinal of buyers.” However, this accession of demands altercation appears to await on a atypical accord amid the 'uniqueness' of a accustomed acceptable or account and the specificity of the asset which is acclimated to aftermath it. This is not alone a ballsy assumption, but absolutely runs adverse to one aspect in the area of specific assets: the 'dedicated asset'.
In addition, the blueprint of economies of calibration acclimated by Lyons (1995) - and additionally acclimated in the empiric assignment declared beneath - is in actuality bugged economies of calibration constant from a accustomed firm's appeal acute a akin of assembly beneath minimum able scale; centralized assembly accordingly suffers from abstruse cipher inefficiency. These bugged calibration economies are absolute by the firm's level.
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