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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
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
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
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”
AOL Time Warner The Deal of the Century Creating The Global Media Powerhouse Is it True?
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
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
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.
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.
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
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.
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.
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.
Merger SWOT AnalysisStrength 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 MotivationOpportunities 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
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
Regulatory Body DemandsFDC – Federal Trade Commission FCC- Federal Comm. Commission European UnionOpen cable system to 3 rivals Instant messaging interoperability TM drope it JV plan with EMIRefrain sabotaging content from rival ISP choice, present interfering customer AOL to dedtach German mediat giantinternet 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 firstservice 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
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.
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.
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.
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.
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.
Failure to Recognize Trends andManage 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
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
Where Do you think AOLTime Warner Stand As of today April 2012?
THANK YOUIT WILL BE MY PLEASURE IF YOU CAN CHECK THE FOLLOWING URL TO HAVE A LOOK ON MYPERSONAL PERSPECTIVE ABOUT M&A IN TECHNOLOGY BASED FIRMShttp://www.slideshare.net/magamawi/mergers-and-acquisitions-why-and-why-not-with-a-focus-on-hightech-industry
Widescreen Test Pattern (16:9) Aspect Ratio Test (Should appear circular) 4x316x9