Mergers and Acquisitions: Time Warner Example

Introduction

Mergers and acquisitions (M&A) is a corporate strategy that involves combining two or more companies to form one single corporation with an aim of expanding the operations of individual corporations in a certain industry without necessarily creating additional business entity. There is a slight difference between mergers and acquisitions though the two words are used interchangeably most of the time. Merger occurs when two different firms/ companies agree to form a large single corporation rather than to continue operating and owned separately. The shares of each firm are surrendered to the newly formed company. The two firms cease to exist after the merger and a new corporation is formed. However, in reality mergers of two equal companies are not common since most of the time a large company merges with a small company. On the other hand, acquisition occurs where one company purchases another company. The combination of the two companies forms a new large company. Depending on the status of the merging organizations in public markets (listed or not listed), acquisitions can be private or public. Again, acquisition can be hostile or friendly depending with how the agreement is reached between the acquiring company and the target company.

Types of mergers and acquisitions

There are different types of mergers and acquisitions depending on the nature of the firms coming together and the process they will use to consolidate their union. To start with mergers, there are fives types of mergers namely;

1. Horizontal merger – this occurs when two companies which are equal or on the same level come together. The companies merging have the same type of product and market.
2. Vertical merger – this occurs when the two companies merging are in different levels especially in production. This type of merger combines forces of a retailer and a manufacturer to enable them increase their market share.
3. Market extension merger- this merger occurs when companies, trading in the same product but in different markets, come together to combine their market share. This will enable them to enlarge their market in that industry.
4. Product extension merger – this type of merger occurs when two companies, operating in the same market but using different products, combine.
5. Conglomeration – this occurs when two or more companies that are not related at all merge to forma large corporation, which offers all the products that were offered by individual companies.

Acquisition may be categorized into two viz. hostile and friendly acquisitions. In case of a hostile acquisition, the directors, shareholders, and employees of the target company receive the information of acquisition by surprise. The M&A deal is reached confidentially and many stakeholders of the target company are not aware of it until the last minute. Hostile acquisition is preferred due to high shareholders value to the acquiring company (Sudarsanam & Mahate, 2006, p.7). On the other hand, in case of friendly acquisition, the two companies carry out their negotiations in a friendly manner. Every stakeholder in the two companies is aware of what is happening and the acquisition does not find them by surprise like in case of hostile acquisition.

Time Warner merger and acquisition

Time Warner is ranked the second largest company for entertainment in the world behind Disney. The corporation was formerly known as AOL Time Warner until recently when it adopted the name Time Warner. In 2000, AOL Company bought Time Warner Corporation in one of the largest acquisitions in the last decade for about $ 164 billion USD. This merger led to the formation of a new corporation, AOL Time Warner. The AOL owned 55 percent while the Time Warner owned 45 percent after the merger. This type of merger can be referred as a horizontal merger since the two companies had revenue and assets that were almost of the same value. The top executives of the new corporation came from both companies and they shared the top posts equally (Malone & Turner, 2010, p.103).

When the companies were merging, their mission was very clear: They intended to combine their synergies and capabilities in order to expand their operations and hence increase their market share. As Akdoğu (2011) asserts, firms form mergers to expand their market share (p.83). AOL initially offered high-speed internet to its subscribers while Time Warner offered online books, magazines, movies, and music. Thus by merging, the new company would offer these entertainment services to the customers at the homes using high-speed internet, initially offered by AOL. This would increase the market share of the new company hence increasing its profitability. Unfortunately, to the surprise of many, the merger between the two companies was not very successful. As it is common with many mergers and acquisition, to coordinate the operations of the former two companies was an uphill task to the executives of the new company.

As Wang and Zajac (2007) indicate, compatibility of the two firms merging is crucial in the success of the new company (p.1291).The divisions of the two former companies continued to operate almost independently and soon their leaders started blaming each other for dragging the new company. The executives of different divisions were not willing to corporate for a common goal after the merger. The division heads also blamed the president of the corporation for setting unrealistic goals and therefore becoming reluctant to implement the new initiatives formulated by the top executives. In 2002, the new company reported a loss of $99 billion USD. This loss was attributed to the incompatibility of different divisions of the company and other factors such as economic recession. Investors lost their confidence with the new company due to problems it was facing, which decreased its shareholders’ value (Mehta & Burke, 2005, p.76). Consequently, the new company continued to experience problems and reporting losses for several years running, the blame game coupled with poor performance culminated into the division of the new company, and the two merging units went separate ways in 2009.

Conclusion

Mergers and acquisition is a corporate strategy commonly used to increase capabilities of different companies in the market. Mergers can be categorized into horizontal, vertical, product-extension, market-extension, and conglomeration. Acquisition can also be hostile or friendly depending on how the process is communicated to the target company. The merger between Time Warner and AOL is an example of horizontal merger since the two companies had almost the same revenue and assets. However, the merger was not successful due to many challenges that faced the process of converging the two companies. This incompatibility between the two companies led to their separation in 2009. Thus, there are many challenges that face a new company after merger and acquisition and its success depends on how the management handles the emerging challenges.

References

Akdoğu, E. (2011). Value-Maximizing Managers, Value-Increasing Mergers, and Overbidding. Journal of Financial & Quantitative Analysis, 46(1), 83-110.

Malone, D., & Turner, J. (2010). The merger of AOL and Time Warner: a case study. Journal of the International Academy for Case Studies, 16(7), 103-109.

Mehta, S., & Burke, D. (2005). Will Wall Street ever trust Time Warner? Fortune, 151(11), 76-84.

Sudarsanam, S., & Mahate, A. (2006). Are Friendly Acquisitions Too Bad for Shareholders and Managers? Long-Term Value Creation and Top Management Turnover in Hostile and Friendly Acquirers. British Journal of Management, Supplement, 17, S7-S30.

Wang, L. & Zajac, E. (2007). Alliance or acquisition? A dyadic perspective on interfirm resource combinations. Strategic Management Journal, 28(13), 1291-1317.