A new trend is born: de-mergers on the horizon

Peter Cohan interviewed by Jorge Nascimento Rodrigues, editor of www.gurusonline.tv, January 2003
Peter Cohan E-mail: peter@petercohan.com
Peter's website: http://petercohan.com

«I think that there is a new trend towards selling off profitable divisions of larger debt-encumbered companies to leveraged buyout firms. There have been several purchases by leveraged buyout firms of yellow pages divisions of large, debt-laden telecom companies in the last year or so.»

What was the strategic ambition of AOL and his CEO in the boom of the new economy?

Steve Case's vision of online services helped to propel AOL into a company with an enormous market capitalization - peaking at $350 billion. This market capitalization spawned the mantra-like repetition of new words, most notably 'convergence.' While 'convergence' had some meaning - that all content and all content distribution mechanisms could somehow be merged together into a limitless value creating machines - the real power of the term was related not to its meaning but to the stock market value associated with the merger.

The take over of Time Warner was a sustained movement or something typical of a bubble era?

Time Warner executives who embraced 'convergence' -- in the form of agreeing to let AOL take over Time Warner -- were intellectually dishonest. If they had been intellectually honest, they would have said that they wanted a chance to make as much money as Steve Case had made through sales of over-inflated stock. As it turns out, Steve Case sold hundreds of millions of his shares, whereas Time Warner's former CEO, Gerald Levin, apparently sold very few of his. AOL's takeover of Time Warner signaled that Steve Case, one of the leading proponents of the dot-com bubble, saw that his creation had peaked and it was time to convert his bubbly currency into something more solid.

What was the rational in terms of media strategy of the merger, if there's any management rationality?

Gerald Levin agreed to the deal because at the time it was perceived that companies without Internet businesses would not survive. Time Warner's Pathfinder service - online versions of its magazines - had failed to make a profit and was shut down in April 1999. Levin thought that AOL -- which appeared to understand Internet business - would somehow be able to figure out how to make Time Warner into an Internet business. The objective was to apply the much higher Internet multiple to the value of Time Warner's revenues. As noted earlier, Steve Case's objective was to get out at the top of the bubble.

For market innovation and consumers what was the advantage of the new group?

Even when the deal was announced, Case and Levin could not articulate clear benefits for innovation and consumers. Perhaps, the two had visions of charging AOL subscribers more money by making magazine articles, music, and movies available to them online. They may also have envisioned increased sales by promoting Time Warner movies, music, and magazine subscriptions to AOL subscribers.

How much money was evolved in all this speculative "affaire"?

News of the $160 billion all stock January 2000 merger intention, the largest in corporate history at the time, sent Time Warner's stock up $25.31, or 39 percent, to $90.06. Time Warner's stock had traded as high as $78.63 and as low as $57.19 during the previous 52 weeks. AOL, on the other hand, fell $1.88, or more than 2 percent, to $71.88. AOL stock had traded as high as $95.81 and as low as $32.50 during the previous 52 weeks. In January 2000 AOL and Time Warner, estimated that the new firm's combined value would be $350 billion.

Stockholders gained with the deal?

The deal has been a failure for shareholders. Between the time the deal was announced (January 2000) and the time it closed (January 2001), the market capitalization of the combined company had lost a third of its value. And after the deal closed the combined company lost far more value. Specifically, between January 2001 when the deal closed and January 2003, the stock market value of the combined company had declined 70% from $225 billion to $69 billion.

AOL move on the entertainment and media sector had impact in other media groups strategies?

The AOL move probably influenced Jean Marie Messier (ex-CEO/PDG of french Compagnie Générale des Eaux, an utility turned Vivendi and later Vivendi Universal) to begin making acquisitions of media properties in the US.

Steve was the "bad" guy?

It's hard to think of this deal in terms of good and bad. There were certainly winners and losers. The winners were the investment bankers who put together the deal and helped to finance various changes in its capital structure. Steve Case and others who sold their shares made hundreds of millions of dollars. Despite his profits, Case has taken a pounding in the press and has been blamed by the merger's losers for their losses. Gerald Levin made less money on the deal and has also taken a lot of public abuse. The biggest loser is Ted Turner who is the company's largest shareholder. Turner's net worth has declined by billions. Smaller losers are all the pre-merger Time Warner employees whose retirement plans are stuffed with far less valuable shares. Many of these employees are journalists who have used their positions to vent their anger. In the process, they diminished their journalistic credibility while reducing their net worth by dumping on their employer. Ultimately those who are most angry about the deal have only themselves to blame. They believed all the hype about the Internet - much of which they were amplifying -- and at the time viewed the merger as their ticket to early retirement. When things did not work out as they had hoped, they were disappointed and decided to channel that disappointment outward instead of accepting the blame where it belonged.

Your personal forecast for this conglomerate?

AOL Time Warner will continue to be a profit center for investment bankers. There will be share offerings - such as the now touted IPO of its cable assets. There will also be divestments of the pieces that the investment bankers previously helped to merge. As the market allows, for example, there could be spinoffs of the AOL unit, the music unit, HBO and other TV production assets, and even the magazine business. At this point it is clear that the whole is worth less than the sum of the parts.

Your personal bet about all this story.

When this deal was announced in January 2000 I was quoted in USA Today - predicting that the merger's promise would be difficult to realize because Time Warner was so full of competing fiefdoms. In my view, the proposed benefits of the merger depended on getting the different parts to work together and the management challenge of achieving that was insurmountable. I think AOL Time Warner will get broken up because it is worth more in pieces than together.

© Gurusonline.tv and Peter Cohan, 2003