AOL-Time Warner: Worst Merger Ever?AOL-Time Warner: Worst Merger Ever?
Time Warner's decision to <a href="http://bits.blogs.nytimes.com/2009/05/28/splitsville-for-aol-and-time-warner/">spin AOL back out as an independent company</a> is the closest thing we'll get to an admission that the marriage between old-world Time Warner and new world order AOL never worked out.
May 28, 2009
Time Warner's decision to spin AOL back out as an independent company is the closest thing we'll get to an admission that the marriage between old-world Time Warner and new world order AOL never worked out.Time Warner + AOL was doomed for a lot of reasons (cultural mismatch, unclear objectives for the merger), but none was more flagrant than the fact that the people who concocted the deal subscribed to the notion that bigger is always better.
Information technology companies don't have a monopoly on mergers gone awry (see Gillette - Duracell in consumer packaged goods or Pfizer - Warner Lambert in pharmaceuticals), but it can boast some of the most spectacular failures in the history of U.S. M&A activity: eBay - Skype: we're an auction company that gets commissions on every deal we broker, so let's buy a telephony outfit that lets people call each other for free. We're both Internet companies, and they're really cool, so it ought to work. Compaq - Digital Equipment Corporation: we're doing great with this PC stuff, so what we need to do is a buy one of those old-line companies with little future, you know, like Burroughs or NCR. But Burroughs got bought by Sperry, so it's not available, and NCR... AT&T - NCR: We're a phone company and we realize we need to figure out this new IT landscape, so let's get someone who understands cash registers and ATMs. Maybe we can get into the retail software business as well (so let's buy Teradata too). Google - YouTube: We're the world's most glamorous company and we're swimming in cash, so no one will notice if we spend $1.65 billion on a loss-making company with no dicernable business model and a pile of content we can't even index properly. I could also add AOL's acquisition of Netscape, but that would feel like piling on, and on the scale of disaster that is AOL, the Netscape deal is just a blip on the seismograph. This doesn't mean that all mergers are created in the crucible of hell. The unison of Compaq and HP has been as successful as the Compaq-DEC deal went south, perhaps because senior management at Compaq had learned from the previous debacle, and HP executives were smart enough to listen. Derided as being an illustration of 1 plus 1 equaling 1.5, HPQ looks like at least a three. More often than not, though, big acquisitions fail because they're made for the wrong reasons. One is, ironically, when companies worry that they have too much cash on their hands. Management is often loath to pay dividends because of the misguided notion that paying them is a tacit admission that shareholders could get better returns elsewhere (otherwise, why doesn't the company invest more in itself). Mergers can also be a form of poison pill. Ironically, Time Warner itself came about as a ploy to help Warner Communications avoid being acquired by Gulf & Western, which had by then acquired dozens of companies, as well as the sobriquet Engulf & Devour. Companies can also have good reasons for making an acquisition, but are so blinded by the rationale for making it that they ignore potential pitfalls; good strategic fits might be poor cultural fits, and vice-versa. Bigger ain't necessarily better. Too often, though, companies make acquisitions for the worst possible reason: they need to make their growth target. And when you're already generating, say $16 billion per year, making an additional $1.6 billion to get your standard 10% growth rate isn't easy without a sizable acquisition. That's something that can only change when the culture of growth at all costs changes as well, and I don't see that happening anytime soon. Can you think of a worse merger than AOL Time Warner? Drop us a line in the comments below.
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