American Online: Time Warner Merger and Other Restructuring

Abstract

In 1990, Time Inc. merged with Warner Communications (WCI) to form Time Warner Inc. The merger was termed as merger of equals. The merger was valued at $18 billion. This merger created the largest media and entertainment conglomerate in the world. In 1995, Time Warner merged with Turner Broadcasting. This merger boosted Time Warner’s position as the world’s largest entertainment and media conglomerate. America Online and Time Warner completed their historic merger on January 2001. Time Warner was taken over by American Online (AOL) at a 71% premium to its share price on the announcement date. AOL had proposed the acquisition in October 1999. The deal valued at $164 billion became the largest merger on record up to that time. The shareholders of AOL and Time Warner held 55% and 45% of the new company, respectively. At the time of merger, AOL had less than one fifth of the revenue and workforce of Time Warner but had almost twice the market value. The merger created the world’s largest vertically integrated media and entertainment company. The expected synergies between AOL and Time Warner never actually materialized. One of the reasons often cited was the slowdown of advertising and subscription revenues to AOL. During the dot-com Internet bubble of the 1990s, AOL’s stock was significantly overvalued. By May 2009, the combined firm had market capitalization of only $28 billion. AOL was the king of the dial-up Internet world, but the new trend was supplementation by always on, much faster broadband. The whole deal turned out to be a big disaster for Time Warner. The analysis of the Time Warner daily stock returns over a 1-year period surrounding the merger period reveals that stock price lost value by about 57% during the time window of 1-year period. The operating performance of the merged company declined in the post-merger period. In the year 2009, Time Warner completed the spin-off of AOL Inc.