Presentation CISM

8/8/2019 Presentation CISM

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Valuing the AOL Time WarnerMerger

Presented By:

Muhammad Awais


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Introduction

On January 10, 2000,Steve Case, CEO and chairman ofAmerica Online (AOL), and Gerald Levin, CEO andchairman of Time Warner, announced the merger.

Merger would combine:

AOLs extensive Internet franchises, technology andinfrastructure

With

Time Warners vast array for world-class media,entertainments, and new brands and its technologyadvanced broadband delivery system.


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Introduction . . . Continued

On March 1, 2000, analyst estimated:

AOL Time Warner

Present Value $92 per share $138 per share

Target Value $102 per share $154 per share

Estimated Value of Combined CompanyApprox. $500 billion

Table:

Merger created vertically integrated Company: Stretched across industries,economic models, and geographic boundaries.


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Introduction . . . Continued

On June 11, 2001, deal closed and the world economyhad slowed.

AOLs stock price had dropped from $72 at the time

the deal was announced to $47 per share.

Time Warners stock price had declined from $90 pershare to $71.

This case enables the analysts to analyze the challengeswhich executives may face to define and executestrategy during a period of uncertainty and change.


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AOL (Pre-Merger)

Launched in 1985 as an online information servicenamed Quantum Computer Services.

Renamed as America Online in 1989.

AOL services: Access to e-mail, games, special interestcommunity forums, etc.

AOL Partnership: American Airlines for travel reservationservices and CNN for online News and stock quotes.

In 1990, AOL began innovative marketing techniques:Free copies of AOL software and several months ofsubscription.


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AOL (Pre-Merger) . . . Continued

In 1994, AOL launched World Wide Web.

During 1997, AOL launched new services like InstantMessaging and Buddy Lists.

Membership exceeded 10 million in same year.

By December 2000, company was the worlds leader in

interactive services, web brands, internet technology,and electronic commerce services.

In December 2000, AOL employed 15000 employees.


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AOL Business Model

Interactive Services: Included AOL.com (27 million members),CompuServe (3 million members), and Netscapes Netcenter (40million users), also on Mobile.

Interactive Properties: Provided online services also on partner and

competitors websites like Digital City,ICQ (

Instant Messaging andChat), Moviefone (Online Movie Guide), spinner. COM, Winamp,

etc.

AOL International: Provided access to country specific versions ofAOL.com within 16 countries outside the United States. 33% userswere outside the united states.

Netscape Enterprises: Provided software products, technicalsupport, consulting, and training services for business users.


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Time Warner (Pre-Merger)

In 1918, Henry Luce and Britton Hadden conceived the idea of Timemagazine.

During the same year, Warner Brothers were developing their firstmoving picture studio on sunset Boulevard in California.

By the 1980, Time Inc. and Warner Brothers had become leaders intheir respective industries.

During that period each company extended its business model byintroducing new products and by acquiring complementary

businesses.

In 1969, Warner Brothers acquired its first broadcast network andrenamed as Warner Communications.


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Time Warner (Pre-Merger)

In 1978, the company acquired its first Cable operator.

In 1989, Time Inc. and Warner Communications merged.

In 1996, Time Warner acquired Turner BroadcastingGroup which had been founded in 1976.

By late 2000, Time Warner had become World Leader inmedia, entertainment, news and information delivery,and broadband infrastructure.

The Company had over 70000 employees.


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Time Warners Business Model

Cable Networks(24% of revenue, 25% of EBITDA): CNN,TBS superstition, TNT as well as HBO and emergingnetworks like the Cartoon Network.

Cable Systems(19% of revenue, 40% of EBITDA): TimeWarner Cable was the second largest cable systemoperator with 6.5 million subscribers. Also ownedRoadrunner broadband service.

Filmed Entertainment(30% of revenue, 14% of EBITDA):Leader in Creation, distribution, licensing, and marketingof movies, T.V. programming, Videos, etc.


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Time Warners Business Model

Music (Warner Music Group)(12% of revenue, 9% ofEBITDA): WMG was marketing US artists overseas andcreating greater global marketing opportunities for artistswith worldwide appeal.

Publishing(15% of revenue, 12% of EBTIDA): Includecreation and distribution of publishing and informationbrands.Brand Name Magazines, and Book Clubs.

Digital Media: Included the Companys integratedinternet-related and digital media businesses includingEntertain Dom (Web Portal).


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Reasons For Merger

For Warner, merging with an existing company was a more effectiveway to distribute its contents via online channels as opposed to

building its own capabilities.

AOL needed a strategy for moving its customers forward into theworld of high-speed "broadband" access, controlled by telephone

companies and cable TV operators (such as Time Warner).


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Transformational

Opportunities

Strategic Options

Tactical Synergies

AOL- Time Warner Strategic Opportunities

Redefine the entertainment and mediaindustries to accelerate and exploit theconvergence of T.V., radio, telephone,

print, and computer technologyindustries.

Enhance the development andgrowth of existing businesses and

services

Identified over 1$ billionincrease in Value during the

first calendar year.


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Concept

Value

Capabilities

RevenueModel Cost

Model

AssetModel

Linking Strategy to Value


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The Deal

Time Warner would be converted into 1.5 shares of anidentical series of AOL Time Warner stock.

AOL stock would be converted into one share of AOL Time Warner stock.

AOL shareholders ended up owning approx. 55% of AOLTime Warner.

Time Warner shareholders owned approx. 45% ofcombined entity.


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Deal Announced:January 10, 2000

Deal Closed: January11, 2001

Stock Price

Market Value of theCompanies

AOL: $167 billion

Time Warner: $124 billion

AOL: $107 billion

Time Warner: $98 billion

Percent Shareholderownership

Common stock toConversion Ratio

1 AOL Share: 1 AOL Time Warner Share

1 Time Warner share: 1.5 AOL Time Warner share

Cost of Walking awayfrom Deal

AOL: $5.4 billion

Time Warner: $3.5 billion

0

20

40

60

80

100

AOL Time

Warner

Stock Price

72 90

0

10

20

30

40

50

60

70

80

AOL Time

Warner

Stock Price

4771

T. W.

45%

T. W.

43%

AOL

55%

AOL

57%


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Valuing th AO Time WarnerMerger:

The View in Spring 2000

Salomon Smith Barney (SSB) analysts attempted to consolidateAOL-Time Warner 2000 Financial matrices.

Gerald Levin described three sources of revenue and cash flow forthe combined company:

Subscriptions (cable service, cable network, and magazinesubscribers revenues): 27% gross margin in 2000 - Steady sourceof revenue and cash flow.

Content (filmed entertainment, music, and book publishing

revenues): 13% gross margin in 2000 - Expected to provideaccelerated, long-term growth in revenue and cash flow.


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Valuing the AO Time WarnerMerger:


Advertising/E-Commerce (advertising and e-commerce revenues):35% gross margin in 2000 - These activities would leverage thehighly predictable and powerful signal of growth.

Revenue Pr d

ucing Synergies

:

Advertising/E-Commerce: Generate $9 Billion and an additional$290 million to $360 million in EBITDA by leveraging itsonline/offline distribution and sales infrastructure in 2001.

Subscriptions:Additional $30 million to $40 million in EBITDA bycross-marketing.


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Content:Additional $60 million to $72 million in EBITDA.

Cost Saving Synergies:

Reduction in marketing costs by 10% to 15%, yielding and additional$230 million in EBITDA.

Save additional $125 million by Shutting down its digital media unit.

Elimination in corporate overhead services (e.g., finance, legal,

human resources) were anticipated to save up to $100 million in2001.


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The View in Summer2001

Merger was finalized on January 12, 2001, and executivesimmediately began to restructure the company.

On January 24, company announced 3% reduction in workforce

which was expected to save $300 million in personnel costs.

Decided to sell or shut down the Warner Bros. chain of retail stores,Time Warners Digital Media Group, and World class Wrestling all ofwhich were losing money.

In Spring 2001, most analysts remained optimistic about thecompanys ability to deliver on its promises.


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The View in Summer2001

But as the worldwide economy stopped progress, this alsohappened to AOL Time Warners aggressive revenue growth.

To boost revenues, US subscription price increased from $21.95 to

$23.90. The price increase would add over $350 million in revenues.

Despite the business slow-down, executives stated that they werecommitted to increase $40 billion in revenue, $11 billion in EBITDA,and 200% in free cash flow.

To support these claims, a number of cross business unit initiativeswere designed to leverage the firms diverse capabilities.


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The View in Summer2001Cross business unit included:

Bank of America and AOL alliance AOL Time Warner and Samsung strategic marketing and technology

development alliance AOL Time Warner and WorldCom strategic marketing alliance

AOL and Universal Pictures marketing alliance, etc.

New initiative to extend AOL Musics current offerings: Included theAOL Music Channel and its Spinner and Winamp sites, which visitednearly 25 million unique users.

In an attempt to boos its e-commerce capabilities, on July 23, AOLannounced that it was making a $100 million equity investment inAmazon. COM.

Finally, in early September 2001, AOL Time Warner bought AT&T,for companys cable assets. This would boost the number ofsubscribers for the merged cable business to 27 million.


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What Went Wrong?

Cultural Clashes

AOL and Time Warner failed to implement their visions andcommunicate them e.g. marketing Time Warner content throughall channels possible. Each division did its own thing.

Lacked the ability to recognize new trends in the digital industry.

Failed to build a business model forInternet telephony or Voice overIP (VoIP).

They were not able to promote their idea of a combined music-platform.

AOL Time Warner missed in the recent years was the importance ofhighly personalized web services.


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