First, let's talk about brand names. When the companies are combined, the mega-conglomerate will be called "AOL Time Warner." How lame is that? AOL has a great brand name right now, and I'm not certain why they want to weigh the company down with Time and Warner. I mean, do people really buy a Sports Illustrated magazine or Madonna records because they are under the Time Warner umbrella? AOL Time Warner is a dumb name.
Let's look at how AOL looks financially before and after the Time Warner merger:
America Online Before After Sales Growth 40-50% 5-10% Net Margins 14% 7-9% Long-Term Debt $0.3 billion $18.1 billion Market Cap. $160 billion $300 billionIt should be obvious that the acquisition of Time Warner will make AOL a much slower growing company with significantly less attractive financials. The acquisition will weigh the company down greatly, taking growth almost completely out of the equation. The larger size of the company will also make it almost impossible for AOL Time Warner to do other mega-deals down the road without raising antitrust concerns. This is AOL's last large-caliber bullet in the mergers and acquisitions game.
From a strategic standpoint, I see some major problems that this merger will cause for AOL. Yes, the merger will create the largest media company on the planet, but the merger will also marry AOL to Time Warner's content. Other media companies will be very reluctant to offer AOL its content since its former advertising partner has now turned into a competitor. Likewise, AOL will be the exclusive online distribution channel for Time Warner's properties. AOL will go from having essentially unlimited content and partnership potential to one with extremely sparse opportunities with third parties.
There's a little bit of history we can draw on here. In the past cola wars, Pepsi <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> had an extremely difficult time getting its product into restaurants other than its own Taco Bell, KFC, and Pizza Hut outlets. Coke's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> negotiating ploy with the likes of McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> and Wendy's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %> was to say something along the lines of, "You don't want to buy from them do you? Pepsi is your competition!" Pepsi finally admitted this major disadvantage and recently sold its restaurant businesses. Long fable short, it's hard to maintain friendships when you're married to the enemy.
Another bone I have to pick with this merger is the fact that many of Time Warner's properties are the exact things that AOL and the Internet are making obsolete. From print media to television stations to even music, the online platform has inherent advantages that are eroding the relevance of these older media. Why AOL wants to buy the very things it is destroying is beyond me.
Finally, let's bring up the issue of cost. Mergers are always an expensive proposition, and this one will be no exception. Beyond the one-time charges to align operations, this merger will create billions worth of goodwill and intangible charges over the next several years. Even hitting a 7% net margin may be tough after all the massive write-offs this merger will create.
As far as cost to shareholders, before the merger announcement, Time Warner's stock was trading below $65 per share and AOL's was at $72 5/8. When the merger was announced, AOL said it was paying 1.5 shares per Time Warner share. That means that AOL was willing to pay almost a 70% premium in order to acquire Time Warner. If I were a Time Warner shareholder, I'd be giddy with joy.
Notice now that both AOL and Time Warner are significantly below where they were after the merger was initially made public. AOL, at this writing, can now be bought for under $59, down about 20% since the merger announcement. Seems I'm not the only one that is giving this merger the thumbs down.
A lame name, slower growth, higher debt, less attractive financials, and a weakened strategic position... hmm, I think there are more than enough reasons for AOL shareholders to vote this proposal down. Instead of organically growing its business with great care, I see AOL as a company that is going out and spending way too much money on a bunch of assets that have marginal if not detrimental value. Sometimes less is more. This is one of those times.
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