A little
over 16 years ago, the merger of Time Warner and America Online resulted in an
unprecedented loss in market capitalization.
Visions of synergy, efficiency and enhanced share valuation evaporated
as reality kicked in quickly. By 2002,
the merged company already had to write off $99 billion in goodwill, an implicit
recognition that a lucrative transformation did not occur. See http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/.
A
significantly changed Time Warner, in a substantially changed marketplace, welcomes
another mega-merger. Proponents invoke
the common refrain: This Time It’s Different.
So is it? The answer
lies in the changes in the company, AT&T and the information,
communications and entertainment (“ICE”) marketplace.
Time Warner
has largely spun off non-core ventures, ironically an elimination of the
vertical integration AT&T now seeks to achieve. Time Warner now concentrates on content creation
and distribution. AT&T has invested
heavily in migrating from wired and wireless telephony into a fully integrated and
ubiquitous ICE venture. Like Time
Warner, AT&T recognizes the absolute need to change its market targets, or
risk loss market share and declining prospects.
AT&T sees content ownership as key to its survival as the content
carriage business declines.
So far so
good: AT&T vertically integrates and move up the ICE food chain into
content creation. It can better manage
its transformation (there’s that word again) into a one stop shop for content
access via any medium, including satellite, fiber, copper and terrestrial radio
spectrum.
AOL and a more
diversified Time Warner had similar goals and expectations. To put it mildly, it did not work out as
planned. AOL’s stock capitalization dropped from about $226 billion to $20
billion. The merged company could not
come up with a successful strategy for managing the transition from a
narrowband, dial up Internet access environment to one with easy and low cost
market access by content and app makers using the broadband networks of
unaffiliated carriers.
Even if “necessity
is the mother of invention” and adaptation, AOL-Time Warner could not make it
work. Maybe AT&T-Time Warner can
with new synergies and enhanced consumer value propositions. For example, AT&T offers its wireless
subscribers a nearly unlimited data plan if they add DirecTV. Such upselling and bundling positively
exploits synergies and the merits in one stop shopping.
We shall
see in 2017 onward, because I expect the deal to achieve grudging, conditional,
but not harmful regulatory approval.
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