America online (aol) Time Warner Merger

In 2001 America Online (AOL) merged with Time Warner (TWX) in what was called the “largest merger in American business history.” At a cost of $165 billion, TWX saw the merger as an opportunity to digitize its content and reach out to a new online audience. AOL wanted to access TWX’s cable system, allowing for increased innovative broadband capability and additional content to provide to its subscribers. Because AOL was an existing company, TWX saw the merger as a more effective way to distribute its content via online channels rather than building its own internet branch. The latter would have been a costly and tine intensive endeavor. According to Stockton (2000), the merger was motivated by four bases: 1) marketing – reducing costs using the avenues and outlets of each other to prospect combined marketing clout. In this context, marketing clout signifies power, influence, skill; 2) distribution – promoting product access through Digital Subscribers Line (DSL) system, wireless, satellite and cable; 3) content – increasing the AOL’s competitiveness with the premium Time Warner content; and 4) efficiency – combining sales forces, advertising and other functions.

Merger Analysis

The merger of the two companies was expected to encompass the total spectrum of media entertainment and information, which would lead to an increase in revenue resulting from AOL’s content, e-commerce, and subscriptions. They believed that Time Warner’s cable systems would expand the broadband delivery systems for AOL computer service’s technology and, over all, they assured that the new business would be benefited from huge operating synergies (cross-promotion, more efficiency in marketing, cost reductions in launching and operating new technologies) as well as major new business opportunities. AOL’s subscriber base and advertising revenues were growing exponentially until the crash of 2000 occurred. AOL resorted to unconventional methods to increase its financial numbers, and was using this overvaluation to acquire an older Fortune 500 company. AOL's high market capitalization relative to that of Time Warner made the acquisition possible.

Success or Failure

A key to a successful merger is a comprehensive evaluation of the compatibility of the organizations involved, most importantly the culture of the companies to be merged. The cultures of Time Warner and AOL were vastly different, and by all reports employees from neither side liked and were prepared to accept the other. The aggressive and, many said, arrogant AOL people “horrified” the more staid and