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AOL Time Warner Merger Case Study

AOL Time Warner Merger Case Study Strategic Analysis, performing a SWOT, discussing the Culture of both firm's using Henry Mintzberg's Model, and evaluating the strategy.

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AOL Time Warner Merger Case Study

  1. 1. IntroductionAmerica Online:Brief HistoryStrategic FormulationStrategic ImplementationStrategy EvaluationIndustry AnalysisOrganizational Culture and StructureTime Warner:Brief History: Time Inc.Brief History: Warner Bros.Brief History: Time WarnerStrategic FormulationStrategic ImplementationStrategy EvaluationIndustry AnalysisOrganizational Culture & Structure
  2. 2. AOL Time Warner:The MergeStrategic FormulationSituational Analysis: StrengthsSituational Analysis: WeaknessesSituational Analysis: OpportunitiesSituational Analysis: ThreatsStrategic Formulation – RevisitedStrategy Evaluation
  3. 3. This case analyzes the merger between Time Warner and AOL.The merger had been established in 2001.The case presents how lack of synergy– if not handled properly - can producecatastrophic effects on corporate success.The case defines how Corporate Culture and Organizational Structure are assets asimportant as Physical and Financial resources.
  4. 4. 1983: Steve Case worked for Control Video, an online gaming services firm.1985: The company changed its name to Quantum Computer and launched an onlineservice named Q-Link.1989: The company expanded upon Q-Link with a new nationwide service namedAmerica Online.1991: Finally, the company itself had been named America Online.BriefHistory
  5. 5. 1992: The company’s Initial Public Offering.1993: Steve Case became CEO.1994: Number of subscribers reached 1 million.1995: AOL Europe had been created.1996: Number of subscribers reached 5 million.BriefHistory
  6. 6. “ A brand company, committed to continuouslyinnovating, growing, and investing in brandsand experiences that inform, entertain, andconnect the world. ”StrategicFormulation
  7. 7. Steve Case placed AOL as the online service for people unfamiliar withcomputers.Steve Case focused on Marketing as a competitive advantage compared tohis competitors.AOL was a pioneer in creating GUI chat services, Interactive online gaming,and the Chat room concept.AOL adapted its services to multiple HW and SW platforms: Apple II, AppleMacintosh, IBM PC, Commodore 64, DOS, Windows, Mac OS.StrategicFormulation
  8. 8. Products: Online Portals, Web Browsers, Instant Messengers, OnlineGaming, Video Streaming.Markets: Individuals and Firms.Functions Served: Marketing, Advertising, Entertainment, Communications,e-Commerce.Revenue Generation Mechanism: Advertising, Subscriptions.StrategicFormulation
  9. 9. On the Corporate Level, the company follows a Diversification Strategy, bothin related and non related businesses.On the Business Unit Level, the company follows Broad Differentiationstrategies, to appeal to as much consumers as possible and to victor overcompetitors.StrategicFormulation
  10. 10. The company implemented its strategies from Within, by relying on its ownknowledge and resources, and from Outside, by relying on Mergers,Acquisitions, and Mutual Agreements.StrategicImplementation
  11. 11. The company’s strategy paid off well:Stock value had grown 50,000 percent since the IPO.The company bought its main competitor CompuServe in 1998.The company at its peak had 30 million subscribers.The company became the premier ISP in USA.StrategyEvaluation
  12. 12. AOL had been operating in a High Technology market, still in the growthphase.Internet Technology had been young, with very fast growth anddevelopment ahead.Companies competed with Technological Innovation.Highly successful firms had no physical assets that match their worth.IndustryAnalysis
  13. 13. IndustryAnalysisTimeDevelopmentAOL
  14. 14. IndustryAnalysis
  15. 15. AOL is a Hi-technology driven company, with a culture of Risk Taking,Innovation, and Flexibility.The company had fast paced, highly-reactive management culture.The company had an Adhocracy structure, where support staff are themost powerful (e.g.: R&D), creating a Pull to Collaborate and tending todifferentiate their products.Organizational Culture&Structure
  16. 16. 1922: Henry Luce and Briton Hadden created Time Inc., a publishing firm.1923: The Company published its first magazine, Time.1930-36: Launched Life and Fortune magazines, despite the great depression.1954-74: Launched Sports Illustrated, Money, and People.1970: The company entered the Cable Television market.BriefHistory: TimeInc.
  17. 17. The company also founded Home Box Office (HBO), a premium cable service.Today, the company publishes 130 magazines.BriefHistory: TimeInc.
  18. 18. 1923: The Warner brothers founded Warner Brothers Pictures.1926: Patented the vita phone process.1928: Produced the first full length film with sound.1929: Introduced Color films.1930s: The company was producing 100 films a year.BriefHistory: WarnerBros.
  19. 19. 1969: Was acquired by Steven Ross’ Kinney National Services.The company became one of America’s largest musicproducers and cable television operators.BriefHistory: WarnerBros.
  20. 20. 1989: Time Inc. and Warner Communications merged.The company was worth $14 billion ($138 billion in today’s money).1996: The Company acquired Turner Broadcasting System.This brought WTBS, CNN, and TNT into the Company’s portfolio.The company became the 2nd biggest cable company in the United States.BriefHistory: TimeWarner
  21. 21. BriefHistory: TimeWarner
  22. 22. Time Warner focused on Quality and Variety of Content as a competitiveadvantage compared to its competitors.On the Corporate Level, the company followed a Diversification Strategy,both in related and non related businesses.On the Business Unit Level, the company follows Broad Best Valuestrategies, to appeal to as much consumers as possible and to victor overcompetitors.StrategicFormulation
  23. 23. Products: Books, Magazines, Cable TV Services, Music, Retail, Theme parks,Film Production & Distribution.Markets: Individuals and Firms.Functions Served: Journalism, Publishing, Media Production, Advertising,Entertainment, Cultural Services.Revenue Generation Mechanism: Advertising, Sales, Subscriptions,Ticketing.StrategicFormulation
  24. 24. Time Warner had been operating in a Mature Technology market.IndustryAnalysis
  25. 25. IndustryAnalysisTimeDevelopmentTime Warner
  26. 26. IndustryAnalysis
  27. 27. The company had genteel, buttoned-down culture.Companies operating in mature industries are risk averse and haveconservative management systems.As a multi-layered company, the company had a Divisionalized formstructure, with Middle Management personnel highly affecting the firm’soperations, creating a Pull to Balkanize and Standardizing Output. This isnatural for a company that follows a Best Value approach.Organizational Culture&Structure
  28. 28. 10 Jan, 2000: Steve Case and Gerald Levin announced the merger.AOL would pay $183bn in Stock for Time Warner.AOL would assume $17bn of Time Warner’s debt.AOL would own 55% of Time Warner.Stock combination value was $350bn.TheMerge
  29. 29. AOL was the 1st Internet Service Provider in the US.Time Warner was the 2nd Cable company in the US.Combined revenue was over $30bn.TheMerge
  30. 30. “ Create the world’s first global, fully integratedmedia and communications company for theinternet century ”StrategicFormulation: Vision
  31. 31. “ Delivering Branded Information, Entertainment, andCommunications across converging media platformsand changing technologies ”StrategicFormulation: Mission“ Speeding growth of interactive medium to provide farreaching benefits to the customers ”“ Offering vast array of world class content to accelerateavailability of Broadband Interactive Services ”
  32. 32. Physical/Technological Resources:Unparalleled assets and infrastructure.The company owned the whole supply chain for Content Creation, Management, and Distribution.Owns one of the most advanced Fiber Optics and Digital Technology networks.Vast array of World-Class Media Content.Technologically advanced Broadband Delivery Systems.AOL now has a new Broadband Distribution Platform .Added Value for AOL, attracting more users: Very Rich online content, discounts on movies,magazines, and cable subscriptions for subscribers.Warner Bros. retail stores will allow AOL to market its services widely.AOL disks will be included in Time Warner’s product shipments.AOL will accelerate Time Warner’s Digital Transformation.Popular AOL products will be available for Time Warner’s Road Runner users.SituationalAnalysis: Strengths
  33. 33. Human Resources:Unparalleled resources of Creative and Journalistic talents.Excellent Management expertise.General Organizational:Excellent Reputation: AOL was the 1st ISP and Time Warner the 2nd Cable Operator.Huge Customer Base: 30 million AOL subscribers and 12.7 million Time Warner customers, also TimeWarner’s magazines had more than 268 million readers.Alliances with leading brands and retailers, making advertising a huge source for revenue.The combination of Time Warner’s content and cable with AOL’s Internet distribution capabilitiesmakes the merger so difficult to duplicate.The merge will allow both companies to go global.SituationalAnalysis: Strengths
  34. 34. Knowledge and Learning:The company is on the edge of all new innovations and technologies.Financial Resources:Stock Combination valued at $350 bn.Combined Revenues of more than $30 bn in the US.Combined Revenues of more than €250 mn in Europe.The ability to take in more debt if necessary.The company’s Financial strength allows it to follow an aggressive acquisition strategy.Online promotion will reduce money spent on newspaper and advertising media.Cross-Marketing will reduce the marketing budget significantly.The ability to cut divisional costs as direct mailing costs are cut in favor of online renewal services..Warner Music can digitally distribute its content rather than manufacture millions of compact discs.SituationalAnalysis: Strengths
  35. 35. Physical Resources:AOL suffered for some time from Low Quality of Service.AOL’s delivery infrastructure suffered from the Last Mile Problem.Human Resources:Top Managers in both companies had no information about the merge, and many of them hadconcerns and reluctance.Execution Risk: Huge difference in Culture due to difference in Technology phase can cause an effect ofLack of Synergy if not addressed properly.Too many big names in the executive management team, which can create problems in decisionmaking.The new management team weighs heavily in favor of AOL, which can create problems.SituationalAnalysis: Weaknesses
  36. 36. General Organizational Resources:Neither AOL nor Time Warner had a major global position, AOL Time Warner conducted less than 20%of its business abroad.Time Warner had a bad reputation among internet investors as an Old, Traditional, Slow Growthcompany.The company structure was strange for investors and cannot be easily valued.AOL’s business model needs time and significant capital investment.Financial Resources:Time Warner suffered from huge debts, from which AOL assumed $17bn.Share prices were declining due to the prolonged approval process.AOL Time Warner’s combined value was $205bn after approval of the deal.Time Warner suffered from high depreciation and interest charges.SituationalAnalysis: Weaknesses
  37. 37. Technological Factors:The rapid Conversion between Media, Computing, and Communications Technologies.The rapid growth of Internet Technologies and its Uses.Socio-Cultural Factors:The emergence of a new generation, eager to get the most out of the internet.Economic Factors:Huge investments in e-companies during that period.SituationalAnalysis: Opportunities
  38. 38. Market Conditions - US:AOL’s added value will secure it from local competition and raise the entry barriers.The entry barrier is already high due to required investments.The company can now raise prices, as it provides unique services to its customers.The bargaining power of customers is high, as Entertainment services are not crucial for peoples’ lives.The bargaining power of suppliers is low, as the company owns its own suppliers.Competition was intense only in the Media and Cable markets (Disney), while in the ISP market AOLhad a huge gap ahead of its competitors.SituationalAnalysis: Opportunities
  39. 39. Governmental/Legal Factors:The merge needed approval from the FTC, which was a lengthy process.The FTC was concerned about antitrust issues and cable access concerns about the merge.The merge needed unexpected additional approval from the FCC.Operations in Europe needed approval from the European Commission.Time Warner had to drop its joint venture plan with EMI to move ahead with AOL merger.AOL had to detach Bertelsmann AG to move ahead with Time Warner merger.Socio-Cultural Factors:A potential risk was a strike by screen actors and writers, which can have negative impacts on thecompany.A problem of protecting Intellectual Property Rights on the internet.Customer unwillingness to pay add-on subscription fees.SituationalAnalysis: Threats
  40. 40. Economic Factors:Volatile stock prices resulted from the change in investor base.The dot-com bubble was at AOL’s door, changing many firms from dot-coms to dot-gones due todevaluation in technology stocks.Investors were concerned about the merger, specially after the failure of Lycos-USA Networks mergerin 1999.Inevitable withdrawal of short term investors’ money while the company awaited approval.Economic Volatility: Completely uncontrollable and unpredictable economic factors.Technological Factors:Solving AOL’s last mile problem globally would be very expensive.Interoperability among separate Instant Messaging brands was a major concern.SituationalAnalysis: Threats
  41. 41. Market Conditions – US & Global:Increased Uncertainty about the market at that time.The Advertising Market – a major source for revenue – was softening.Technology alternatives existed such as: Satellites, Fiber Optics, and DSL.Intense competition from the following firms: Vivendi Universal, NewsCorp, Walt Disney, BertelsmannSituationalAnalysis: Threats
  42. 42. On the Corporate Level, the company is seeking Vertical Integration of the supplychain, while at the same time keeping the company diversified in its business.On the Business Unit Level, the company is seeking Broad Best Value approach.StrategicFormulation -Revisited:
  43. 43. StrategyEvaluation:
  44. 44. StrategyEvaluation:
  45. 45. StrategyEvaluation:Management did not take into account the importance of Organizational Culture andStructure for ensuring survival.The company failed to address Cultural Differences among its employees, although it hadunmatched physical, technological, and human resources.The Structure of the management team caused huge conflicts among employees, speciallyfrom Time Warner’s side.The company had no specific structure as it had a mix between a Divisionalized firm andan Adhocracy based firm. This created conflicts among personnel.The company also suffered from AOL’s surprising devaluation because of the dot-combubble.
  46. 46. StrategyEvaluation:“ The value of this merger lies not only in what itis today but in what it will be in the future ”Bob Pittman, AOL Time Warner COO - Jan 2000
  47. 47. StrategyEvaluation:He was right

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AOL Time Warner Merger Case Study Strategic Analysis, performing a SWOT, discussing the Culture of both firm's using Henry Mintzberg's Model, and evaluating the strategy.


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