Towards the end of the 1990s tech stock bubble, “new media”, the Internet, was ascendant and old media like magazines, newspapers and broadcast TV were yesterday’s news. This was reflected in relative stock valuations, which gave Internet pioneer AOL the ability to buy venerable media giant Time Warner for what looked (accurately in retrospect) like an insane amount of money. Now fast forward to 2017. Online retailing is crushing bricks-and-mortar, giving Amazon all the high-powered stock it needs to do whatever it wants. What does it want? Apparently to run grocery stores and pharmacies via the acquisition of Whole Foods, the iconic upscale-healthy food chain. The two deals’ similarities are striking, but before considering them; Here’s a quick AOL/Time Warner post-mortem:
# Fortune; 15 years later, lessons from the failed AOL-Time Warner merger.
The landscape of mergers and acquisitions is littered with business flops, some catastrophic, highly visible disasters that were often hugely hyped before their eventual doom. Today marks the 15th anniversary of one such calamity when media giants AOL and Time Warner combined their businesses in what is usually described as the worst merger of all time. But what happened then will happen again, and ironically for the exact same reasons.
A lot of people thought that the merger was a brilliant move and worried that their own companies would be left behind. At the time, the dot-coms could do no wrong, and AOL (AOL) was at the head of the pack as the ‘dominant’ player. Its sky-high stock market valuation, bid up by investors looking for a windfall, made the young company more valuable in market cap terms than many blue chips. Then CEO Steve Case was already shopping around before the Time Warner opportunity came up.
On the other side, Time Warner anxiously tried, and failed, to establish an online presence before the merger. And here, in one fell swoop, was a solution. The strategy sounded compelling.
Time Warner (TWC), via AOL, would now have a footprint of tens of millions of new subscribers. AOL, in turn, would benefit from access to Time Warner’s cable network as well as to the content, adding its layer of so-called ‘user friendly’ interfaces on top of the pipes. The whole thing was “transformative” (a word that gets really old really fast when reading about this period). Had these initial assumptions been borne out, we might be talking today about what a visionary deal it was.
Merging the cultures of the combined companies was problematic from the get go. Certainly the lawyers and professionals involved with the merger did the conventional due diligence on the numbers. What also needed to happen, and evidently didn’t, was due diligence on the culture. The aggressive and, many said, arrogant AOL people “horrified” the more staid and corporate Time Warner side. Cooperation and promised synergies failed to materialize as mutual disrespect came to color their relationships.
A few scant months after the deal closed, the dot com bubble burst and the economy went into recession. Advertising dollars evaporated, and AOL was forced to take a goodwill write-off of nearly $99 billion in 2002, an astonishing sum that shook even the business-hardened writers of the Wall Street Journal. AOL was also losing subscribers and subscription revenue. The total value of AOL stock subsequently went from $226 billion to about $20 billion.
*) Now back to Amazon/Whole Foods. Amazon is going to apply its advanced technology, online ordering, fast delivery, drones, autonomous cars, whatever, to the quintessentially meatspace business of selling groceries. And it’s paying $13 billion to find out if this is a good idea.
Whether it is or isn’t is less important than what this type of M&A says about the mindset of a given cycle’s favored companies. When undreamed-of amounts of money start pouring in (as with the dot-coms of old and today’s Big Tech) it changes the perception of risk. $13 billion is a terrifying amount of money to bet on a new and untested idea, except in the context of a near-trillion dollar market cap, where it seems downright modest.
When the next bear market hits, though, that kind of money might seem a bit hubristic...
As with so many other extraordinary recent market events (record-high stock prices combined with record-low volatility, negative yields on government bonds, soaring debt/GDP combined with falling inflation), Amazon/Whole Foods might or might not be the bell that rings at the top.
But when the history of this time is written, there’s a good chance that it will be somewhere on the list...