aol-time-warner-并购模型.doc

8/28/03aols obsolete business model hurt twxj. fred weston and brian johnsoncenter for takeovers, restructuring and corporate governance, uclain december 1999, america online (aol) found itself in an interesting position. the firm reached its highest market capitalization of all-time, over $200 billion. the firm had gained this position through a combination of a large subscriber base, a robust advertising market, and a rising stock market which highly valued internet firms. aol was the most recognizable internet service provider (isp), connecting close to half of all users to the internet.despite the firms successes and the attention of the financial markets, aol was a firm facing several potentially serious issues. these weaknesses prompted the firm to undertake a combination with time warner, the largest merger in history.aol at its peakthe isp industrythe boom in internet-related industries helped to fuel the u.s. economy in the late 1990s. many different types of firms benefited from the popularity of these stocks (equipment makers, providers of online content like the media companies, online retailers, software makers, and isps). in its simplest form, the isp provides the link for the consumer to access the internet. once connected, the user can run various software to access email, browse the world wide web, or perform other functions. some isps, such as aol, had their own proprietary software that enabled users to have added functions that were specific to that isp, such as chat programs, special interest communities, and other functions.during the late 1990s, as money poured into firms related to the internet, many new isps emerged. the isp industry proved difficult for many of these firms. a substantial capital investment is required to get the necessary equipment up and running. this is magnified if companies seek to create a nationwide service. during this era, aol maintained leadership of the isp market, but many competitors emerged offering low or no monthly fees. these firms believed that they could use advertising revenue in place of charging users a monthly fee. they were supported by large advertising campaigns. ultimately, the bust of the internet stocks eliminated most competitors. meanwhile, the industry was being transformed by the increasing popularity of broadband. firms were finding it difficult to change from a dialup provider to a broadband isp. while dialup allowed isps to utilize the existing phone system, broadband presented a new “last mile” problem. broadband was typically offered either through cable or phone lines. cable companies upgraded their television lines to allow them to transmit internet data. phone companies offered digital subscriber lines (dsl), which allowed users to have an “always on” connection that worked much faster than a modem. many cable and phone companies established their own isp systems, making it somewhat redundant for users to seek out another isp. as the business and regulatory environment evolved, dialup isps, like aol, were left to strike a patchwork of deals, alliances, and partnerships with cable and local phone companies to gain access to broadband customers. under such a system, end consumers would pay a premium for the additional isp services. this made things very favorable for the broadband provider and put the dialup isps in a difficult position. in order to draw new customers, they would have to offer software and other content that was compelling enough for consumers to be willing to pay a premium on top of already expensive broadband services.aols business modelaol relied primarily on two sources of revenue: subscriptions and advertising (including e-commerce). it also provided some enterprise solutions, which involved software licensing and consulting services with other companies. table 1 provides aols value drivers from 1995-2002 (note that 2001 and 2002 are for the combined aol time warner).aols subscription revenue was derived directly from its large subscriber base. aol built its large dialup user base by attracting certain types of consumers. aols main target was the pc owner who had little knowledge of the internet. aol mailed millions of cds with its easy to install and operate software. unlike many isps, aol made the internet simple and easy for its customers to access. aol was more expensive than many of its dialup isp competitors, but it justified the price with its customer service, reliability (after some difficulties in the mid 1990s when the company allowed unlimited hourly access to users and overloaded its systems), and proprietary software like its “chat rooms.” by using the strategy of bringing in new users, aol managed to build its user base to approximately 27 million users by mid 2002. the large number of subscribers enabled aol to charge a premium to advertisers. aol became a coveted source of internet advertising. few websites had access to as many users as aol. in the booming internet environment of the late 1990s, aol was able to profit greatly from the dot-com firms. these companies were flush with venture capital and were desperately seeking to draw users to their services. in this environment, aols advertising revenue became so robust that the company seriously considered abandoning subscriptions and deriving all of its revenue from advertising. many competing isps attempted this approach, only to be driven out of business or to a subscription system by the downturn that began in 1999-2000.aols use of m&asby the late 1990s, aol had outsourced the technical isp functions and positioned itself as an aggregator of subscribers. these subscribers gave aol a captive audience giving it considerable bargaining power with advertisers. no other isp offered access to as many users as aol. because it was the largest isp, aol was able to negotiate favorable deals. for many dot-com companies, a deal with aol gave fledging companies instant credibility on the stock market. aol capitalized and accepted large amounts of cash and/or stock from the firms. aols large subscriber market also made it an attractive partner for retailers. by advertising or opening virtual shops on aols site, retailers were able to drive online sales. meanwhile, aol profited via advertising revenue and/or deriving a share of e-commerce purchases.aol also utilized a large number of acquisitions to build up a variety of online properties and services. it acquired properties like netscape, m, and nullsoft (the maker of winamp, a popular music-playing software). these companies gave the firm added influence in the online world. acquiring such internet-related firms also gave aol the potential to increase features it could offer exclusively to its subscribers. aols strategic challengesthe need for more content to offer subscribers was only one of the challenges facing aol. the rapid growth of broadband was making content a critical issue for the company. because of the nature of the broadband environment, aol could not count on users being willing to pay a premium for its services. it would need compelling content. in addition, by building its base primarily of new internet users, aols potential pool of new customers would decline as a higher percentage of the general population became connected to the internet. the trend had been that aol customers would leave as they became more internet savvy. thus, although aol was highly valued in late 1999, it was at a critical point. executives recognized that its growth in subscribers was bound to slow drastically as broadband growth continued. this would cut not only subscription revenue, but also advertising revenue. aol needed to revitalize itself in the face of technological destabilization. the outcome of this situation was the combination with time warner, a leading entertainment company.the time warner dealtime warnerprior to its combination with aol, time warner was one of the largest firms in the entertainment industry. the firm had a large combination of holdings. time, inc. was the flagship of the firms large portfolio of publishing properties, which included approximately 25% of advertising revenue among u.s. magazines. in addition, time warners warner music group was a leader in the music industry. time warner also was involved in cinema, owning movie production companies. time warners television holdings included the wb network, and several cable channels, including hbo. however, some of these holdings were complicated by their partial ownership by time warner entertainment (twe), a complex entity that was partially owned by several cable companies. included in twe were actual cable firms that supplied cable tv to approximately 10 million households. with such a large portfolio of entertainment properties, time warner was seen as a key controller of “content” in the industry.the entertainment industry proved problematic for many acquirers in the 1980s and 1990s. the 1989 combination of time and warner produced disappointing returns to shareholders, lagging most indexes through the 1990s. some firms, such as universal, were shuffled from one acquirer to another as the firms found that returns in the industry had a tendency to fluctuate greatly. this revenue uncertainty in the entertainment industry was due to several factors. first, much entertainment revenue is dependent on advertising. advertising spending fluctuates in response to changing economic conditions. as a result, industries that depend on advertising revenue have exposure to changes in revenues. second, the nature of much of the entertainment industry is that trends and fads will make some products extremely popular (and usually profitable), while others may be entirely rejected by the public. the creative nature of the industry makes it difficult to produce consistently well-received products.table 2 presents the value driver information for time warner from 1992 to 1999.deal termsaol and time warner announced their intention to merge on january 10, 2000. many analysts were optimistic that the combination would prove to be an effective match between content, provided by time warner, and the new form of distribution represented by the internet, provided by aol. the basic financial relationships of the deal are summarized in table 3. the merger terms specified that time warner shareholders would receive 1.5 aol shares per time warner share.the market reacted negatively to the announcement. aol stock declined greatly following the announcement of the deal. most analysts attributed this to the large premium that aol was offering to time warner shareholders. table 4 and figure 1 show the event return for the period of 20 days before and 30 days after the announcement. the losses of the combined shareholders were about $8 billion, with aol shareholders $38.7 billion of losses offset by time warner shareholders $30.7 billion of gains.reasons for the mergeraols reasons for the merger the merger would create the first fully integrated internet-powered media and communications company. the complementary assets of the firm were predicted to accelerate the growth of subscription and advertising/e-commerce revenues, as well as creating new business opportunities for traditional media properties. america onlines internet resources were seen as a means to drive the digital transformation of time warners divisions, and time warners resources were to advance the development of next-generation broadband and aol services, as well as build subscription and advertising and e-commerce growth throughout aols brands and products. aol estimated total ebitda synergies of $1 billion in the first full year of operations.time warners reasons for the merger executives saw an opportunity to fully integrate traditional with new media businesses and technologies. aols extensive internet infrastructure was to provide an expanding distribution medium for twx products. the advanced broadband delivery systems of time warner were expected to provide an important distribution platform for aols interactive services.the co-chief operating officer was designated to be robert pittman, who had been president of time warner entertainment before leaving to become president of aol several years earlier. pittman was highly regarded at twx, and brought experience with both companies. this experience was expected to provide effective leadership for integrating the two companies.difficulties of the combined companyby mid 2003, the combined aol time warner had lost about 80% of its value. while aol shares had been valued at over $70 before the merger was announced, by the summer of 2003 the price had fallen to approximately $16. table 5 and figure 2 illustrate the change in the markets valuation of the company. numerous factors were cited to explain this dramatic decline.economic/advertising recessionbeginning in 2000, the u.s. economy entered a downturn. the stock market began to fall significantly, drastically tightening the money that was available for internet firms in the capital markets. toward the end of the year, many of the “dot-com” firms were failing. these firms had been large spenders on advertising, particularly online. this downturn had serious effects for aols business model, which relied heavily on advertising for profitability. in addition, the overall effectiveness of online advertising came into question. advertisers became more discriminating and began to carefully track the number of sales that resulted from online advertising. this skepticism helped to significantly drive down the cost of online advertising as well. these factors contributed to a dramatic decline in aols valuation. table 6 shows the difference in analyst forecasts for aol in 2000 versus the aol unit in 2003, when aol time warner was said to be in serious discussions to remove the aol portion of its name. recognizing this weakness, aol tried to make its advertising deals long-term beginning as early as 1999, sometimes to the point of stretching accounting conventions.meanwhile, the economic factors had an impact across the advertising industry, which also was costly to the time warner divisions of the newly combined company. the combined aol time warner was officially formed in january 2001. coincidentally, that was also the first year since the early 1990s that overall advertising revenues declined. as a result, the aol time warner media juggernaut was suddenly operating in a poor advertising market. the effects hit the online, television, magazine, and other divisions. the overvaluation of aolanother possible explanation for the dramatic decline in value of aol time warner is that aol was simply grossly overvalued by the market. this is supported by the dramatic decline in all of the internet stocks. in january 2000, when the merger was announced, aol was valued at $180 billion by the market. by the middle of 2003, most analysts were looking at aol time warner with the caveat “even if the aol division is valued at $0.” with such a large change of value in two and a half years, there seems to be credence for the argument that aol was propelled by a “bubble,” “irrational exuberance,” or some other explanation for the market simply misvaluing a firm.differences in corporate cultureto make the complicated task of merging two very different firms even more difficult, the management teams of the two firms did not get along very well. the aol managers came from a relatively free-wheeling environment where there was a lot of leeway. time warners people were used to a more traditional and bureaucratic environment. these contrasts made it difficult to coordinate anything between the two companies. as a result, synergies were slow to materialize. managers did not successfully coordinate a means of fully utilizing the aol network as a distribution vehicle. however, there was some success with cross advertising. the most conspicuous examples were the large amount of internet promotion for the warner movies, harry potter and the sorcerers stone and the lord of the rings.the most visible acknowledgement of the cultural difficulties within the firm was the pressured resignation of pittman in july 2002. pittman was seen as a good liaison between the firms. he had worked for time warner before moving to aol. pittman was placed in charge of integrating the two firms, and later he was moved to the coo post of the combined company. however, he gained a bad reputation by making promises to achieve earnings and synergy goals and subsequently breaking them. the two stories that emerged when pittman left were: 1) he had done a poor job of delivering synergies and earnings that were expected and needed to be removed; 2) he was simply a scapegoat and the company was too troubled to be able to deliver on any of its earnings targets.ultimately, the dramatic decline in aols value gave former time warner employees the justification to take full control of the upper management of the combined firm. as aol began to be investigated for its accounting practices, a former time warner executive was even put in charge of the aol unit.transition from narrowband to broadbandone of the fundamental flaws of the aol-time warner combination was that as of 2003 the merger had not had a significant effect on aols move toward broadband. the few bright spots were the ability to offer aol over time warners cable systems, the use of some time warner content in the aol site, and advertising synergies. however, the reality of 2003 was a far call from aols vision as it stated in its merger prospectus: “the combined company will be able to lead the next wave of in