Sunday, October 23, 2016

AOL-Time Warner ($160 Billion in 2000) vs. AT&T-Time Warner ($85 Billion in 2017): Is It Different This Time?

            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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