AOL Time Warner Post Mortem: The Next Media Merger Train Wreck

What will be the next media merger train wreck?

Costly lessons from AOL Time Warner, the most dysfunctional merger of all time, will not stop other media players from following suit. The urge to merge is being fueled by the pent up demand for deal-making and the bulging inventory of companies needing to be flipped in a distress sale or an investor exit strategy.

Many major players have healthy cash flow and huge cash reserves, and there is lots of sideline liquidity waiting for asset valuations to be reset amid a volatile market, recession and digital revolution. The widely-held notions persist– that companies achieve exceptional growth through post-merger synergies and cost cuts, and that there is an urgent need to integrate so-called old and new media. But it’s not always that simple.

Although such forces drove AOL and Time Warner to announce their $182 billion merger in 2000 , too many differences in corporate cultural, accounting, strategic direction and metrics got in the way. And it didn’t help that AOL executives fudged on their numbers heading into the union.

Still, other media companies are positioned to walk the M&A plank as the economy and credit markets improve. Those who remain reticent will find other ways to build value.

The long-suffering idea of a search and display partnership between Yahoo and Microsoft would likely yield much of the same cost savings, new revenue synergies and valuation impact as when Microsoft offered to buy Yahoo for about $44.6 billion in cash and stock in January 2008. An alliance would provide Yahoo with traffic gains, better monetization and cash from a Microsoft equity investment. Microsoft would get a tech platform, improved monetization and partial ownership of an established online brand.

The resulting numbers are big: Yahoo would gain $670 million in gross revenue search synergies and more than $1 billion in annual cost savings, according to Credit Suisse analyst Spencer Wang. As with an outright merger of the two companies, success boils down to two things: integration and execution which are far from assured.

Media deal speculation is rampant despite some company executives’ remarks to the contrary: Does Google eventually buy Twitter or Time Warner buy Joost? Will Time Warner Cable seek to absorb Charter Communications? Will Yahoo and Microsoft enter a three-way with an independent AOL?

In the spirit of all things being for sale at the right price, Yahoo CEO Carol Bartz concedes she would do a Microsoft search deal for “boatloads of money,” that is if it doesn’t by AOL first for a mere $10 billion.

And what about the on and off merger saga of CBS and Viacom whose inexorably linked fates will be shaped by the debt problems of their common majority shareholder and chairman Sumner Redstone? CBS’ traditional advertising-dependent woes could make it an acquisition target or call for folding it back into Viacom in better times.

Even Time Warner could be fodder for more merger madness as it seeks to expand its already formidable content portfolio. General Electric could seek to ease its own debt problems by selling NBC Universal, whose cable networks and film studio operations would be a good fit for Time Warner. But trying to recoup on NBC’s tumultuous TV network and station businesses would be expensive and painful. With valuations pitifully low, some on Wall Street speculate Time Warner could become a takeover target for the cash-rich News Corp. or Comcast.

The general failure of past content and distribution vertical integration won’t stop media players from trying again. The salvation of publishing and television-based companies may depend on continued consolidation.

The media mergers and acquisitions that have succeeded have been content-centric unions such as Turner Broadcasting with Time Warner and Pixar Animation with Walt Disney Co. With the commoditization of distribution and access, narrowly focused content and service deals could prevail such as DirecTV and EchoStar, or QVC and Home Shopping Network.

The rapidly changing digital media economy—seeking to balance paid with free, to transform advertising to e-commerce, and to monetize social networks—will increasingly leverage interactive connections between advertisers, target consumers, and the content and services they crave. That will become the holy grail of media deal-making—whether they are mega mergers or tuck-in acquisitions. Besides, the players just can’t help themselves.