Merger Of Aol And Time Warner

Category: Internet, Tax, Time
Last Updated: 07 May 2020
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Merger is a combination or coming together of two companies to make a larger company. It involves stock swap or payment of the cash to the target. Merger can also be referred to as ‘combination of equals’. The stock swap is meant to allow the two companies’ shareholders share the risk or benefits that may accrue due to such event. A merger involves the change of company name and even re-branding.

There are different types of mergers, namely; Horizontal merger- where two different companies producing similar products in the same industry; Vertical mergers- when two different companies working in the same industry but at different levels in the production of one good combine to form one larger farm; concentric or congeneric merger- where the two merging firms are in the same general industry but have no mutual stakeholders relationship like buyer/ customer or supplier relationship.

For example a merger between a bank and a leasing company; and conglomerate merger which occur when two firms operate in different industries. (Gancel, 2002) Time Warner, a leading media and entertainment company, and AOL, An online company specializing in internet media combined to form a company known as AOL Time Warner. The two companies have agreed to merge in order to have a more powerful presence in the market, with AOL maintaining 55% of the shareholding while Time Warner taking 45% (Camerer, 2003).

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According to Jim Leddbetter, New York Bureau Chief for the Industry standard, this merger will allow the two companies get a peace of the internet future that they could not provide by themselves. In this case AOL helps Time Warner to move into the internet, while Time Warner being a leader in the news, entertainment, advertising and publishing industry brings in a new way of providing entertainment to the people or their clients, combining both old media technology and the new media technology information transfer.

According to Scott Ehrens, a media analyst, the combination of two companies will present unprecedented powerhouse, which they would have the power to dominate and control the market share (Davis, 2000) Financial statement, ratios and cash flow Time Warner is the biggest media and entertainment company and creates about 30 billion dollars annually. However the Warner technology reaches only 30% of the Americans and with annual growth of 10-15%.

With AOL already boasting 20million subscribers in its internet services, high speed broadband access to more than 13 million Time Warner subscribers, helped the new company as still the leading internet provider (Bower, 2003). So in order to get into that broadband business, doing it with AOL can give instant revenue boost since the new merger gives the leading media and entertainment firms a chance to get access to the intended clients and the biggest internet access information provider.

It was expected that the cash flows would increase due to the popularity of the two brands (Noreen, 1997) Risk management The merger between these two companies has a risk of not receiving the larger market as may have been projected. However the risk has been spread between the two companies. Secondly, the risk management has to do with the ability to handle any foreseen risk related to the merger of such big companies. It therefore right to conclude that there is the risk, of people or targeted recipients are not likely to receive the offerings as fast as possible.

However the history of such business approach indicates that someone has to pay for bringing technology to the people. The premise that people may not pay for the service does exist and therefore the merged companies are likely to solve this through diversification of their products. Valuation of the merged companies This deal resulted in the market capitalization of the new company to be at around 350 billion and annual revenue of 30 billion.

With the biggest ever merger in the history of the United States and the valuation of Time Warner with annual revenue of 30 billion dollars and annual growth of 10-15% and the AOL’s market niche, the value of the new company will be great according to the projections. In this case, AOL has access to a larger market share while Time Warner has the information to give to the mass. This will give the newly merged company an edge over the other potential competitors because they already had very strong brand name in the market and therefore the mass seem to judge them as the most reliable in terms of in formation passage.

This table below summarizes the brief financial statement of the two companies as the years 1998 and 1999(Gansel et al, 2002) Cost component of the merger AOL has been making strategic alliances with other service providers. However, in this deal that saw AOL part with close to 182 billion dollars, has proved to be the biggest merger ever and is considered the most prestigious considering the brand names associated with it. For example CNN, Sports Illustrated, superman, time magazine which are the leading brand names of the world.

The analysts observed that this merger presented a fundamental principle on how the new company will be structured in the digital economy and how the internet services would be viewed in future. Capital budgeting for the merger Many analysts argued that it was pointless to spend billions of shillings on capital budgeting to recreate what people already get on their televisions. The argument was that who would want to watch news or television programs in their computers when the television remote is just next to them.

This argument is backed by the reasoning that Time Warner and CNN have applied the same approach almost with little success. However, the proponents of the merger argued that it was not a matter of watching television on the internet but having a new breed of media that uses the internet and television elements, increasing the interactivity of the shows and programs. So this justified the huge capital budgeting AOL has put down for this new acquisition.

For example the two companies talked about streaming the videos into your computers, where people can just call in and ask for the videos they want to watch or even watch news over the internet just like we do it on television, and down loading music which has proved very difficult due to the slow access speed to the internet. With the time Warner Road Runner Services, it has potentiality to deliver these services. And AOL wanted to be part of what was going to the consumers. How the companies financed the merger The two companies’ merger is in the sense that AOL is to purchase the Time Warner at a cost of 182 billion dollars.

The proponents of the projects defend the deal that even though it is going to be a huge a mount of finance, it was worth long term investment. The new capital change The capital base of the new company increased to 350 billion U. S dollars after the merger. With this, it is no doubt the company has an enormous capital base on their names. The next level now would be to pull these resources together such that people tilt in certain directions. They supposed to make sure they use these enormous resources to make sure that when people go online, they are tilted in a certain direction.

Saving of tax from the merger Since the company will be operating as a single company, it definitely reduced the tax revenue unlike when they operated as two different entities. The merger also would result in large economy of scale hence reducing the cost of operation. The dividend policy before and after the merger The policies of the two companies were harmonized in order help the new company have a comprehensive policy on dividends. The shareholders of Time Warner received 1. 5 shares in the new company, while AOL shareholders received one share each in the new company.

This gave the projection of the dividend that was given to each shareholder after the merger. Stock price movement after the merger After the merger, the potential investors were expected to have more confidence in the newly merged company. However, this was not to be. The stock price of AOL reduced with about 9%. On the other hand, the sock price of Time Warner increased. This resulted in the speculation which saw stock prices of other rival firms soar up because investors started looking at the merger with doubt. The merger process The merger process involved steps that allowed each party to assess the suitability for merger.

Then the board members analyzed their assets and liabilities for merger. The concerns of the board members were analyzed and a consensus reached. Such concerns like how the culture of the organizations would be merged and how effective internal communication would be used were the bedrock of the discussions. Negotiations; the parties discussed the circumstances under which a merger would occur and why. The communication process was discussed where the board members implored ways of passing the information to both internal partners and external constituencies (Mueller, 1986)

Pre-merger event; this was the day the merger took effect i. e. the legal issues were ratified and the merger took effect legally. In this stage the organizations identity are still maintained while assuming their future is joined. The planning process began here and to some extent implementation. The announcement to the public was done at this stage and this reduced the anxiety. Legal merger; this is the date the merger was effected legally The immediate post merger; this is where real integration began and things started taking shape.

The new ways of doing things began here albeit slowly. Integration; this process is expected to last for about a year and the entity is expected to be fully integrated. That is the people, programs, and the systems are all integrated. Communication to the stakeholders The two companies’ executives communicated the merger process to the stakeholders through press and private memo according to the companies’ policies. The memo was sent to all the stakeholders whose daily operations of the two companies affect or is affected by the two companies.

This group included the employees, suppliers and contractors, and shareholders. The public were informed through the media. The reactions of employees and other stakeholders The offer which AOL gave, 163 billion US dollars, soared up Time Warner’s share prices. This was good news to Time Warner’s shareholders. On the other hand, AOL share holders received news with mixed reactions. This bounced the stock to negative price for some time. AOL’s shares lost 3/8 to 73 -3/8. In this deal, Time Warner shareholders received 1. 5 shares of the new company for every share they held in the previous company.

AOL shareholders on the other hand received one share each for every share they held in AOL previously (Camerer, 2003) This deal also pushed other media and technology companies’ share prices up as investors started guessing where the next big deal would be. The employees were not impressed by the merger as they expected layoffs. This was due to restructuring on the new company’s programs (Boyan, 2001). Conclusion The merger between AOL and Time Warner proved to be the biggest merger in the history of corporate merger in America. The capital base of the new company increased enormously after the merger (Cartwright, 1995).

However, this did not reflect the confidence with stock market investors as expected. Speculation lead to the new company losing in terms of the share prices I the stock market. However the merger presented an opportunity to spread the risks between the two companies. The employees were laid off in the restructuring. This is because the merger gave the opportunity to reduce the cost of operations. The merged company’s big promise to the consumers and the investors of the content of their products never picked up with the consumers.

The shareholders also never got what they expected as the share price of the company continued to dwindle uncontrollably. Experts argued that the merger was not manageable as it was too big to manage by one single unit of management (Henry, 1999). The investors confidence was withdrawn hence it was difficult to convince people to invest in the company’s shares. This is probably attributed to the big promise of the company executives that they were projecting growth of 30% annually. After 6 years in the merger, the company could only produce 13% growth. Even though this was a good growth, it was far much below the promise and expectation.

This unexpected outcome is due to several factors that could be beyond the firm’s control, economic recession all over the world (Mitchell, 1990) Bibliography Camerer, C. (2003). Culture Conflict and Merger Failure: An Experimental Approach. Management Science, Vol. 49, 400-415 Davis, S. (2000). Bank mergers: Lessons for the future. New York: St. Martin's Press. Gancel, C et al. (2002): Successful Mergers Acquisitions and Strategic Alliances: How to Bridge Corporate Cultures. New York: McGraw-Hill Companies. Cartwright, S. et al (1995): Managing Mergers Acquisitions and Strategic Alliances: Integrating people and cultures.

Pennsylvania: Butterworth-Heinemann. Bower L. (2003): Study M;A- Working Paper 03-026, Harvard Business Review, Noreen, E. (1997), Cost Pricing and the illusion of satisfying, Journal of management Accounting Research. Henry, S. (1999): Growing Pains-Mergers Do Not Go Without Some Risk, Silicon Valley Mitchell, M. et al (March 1990): The impact of Industry Shocks on Take over and Restructuring Activity, Journal of Finance 45: 131-48 Mueller, C. (1986): Profits in the Long Run, Cambridge, Cambridge University Press Boyan, N. (2001): Mergers and Technological Change: 1985-1998’, Mimeo, University of Chicago

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