AT&T-Time Warner deal raises specter of AOL Time Warner deal
The last time $100 billion was spent buying Time Warner was back in 2000, when the media giant joined forces with the dotcom-era darling AOL in a stock-based merger that proved so disastrous it's widely seen as the worst corporate marriage in history.
It turned out that after the dotcom crash, an overly inflated AOL was forced to take a monstrous goodwill write-off of nearly $99 billion on Time Warner in 2002. AOL's market value slumped from $226 billion to around $20 billion. A few years later Time Warner spun off its Time Warner Cable division and then AOL as independent companies. The vastly shrunken AOL was acquired by Verizon in 2015 for just $4.4 billion.
Looking back, the AOL-Time Warner deal was marred by cultural incompatibilities and AOL's inability to respond to the rise of broadband vs. dial-up internet access. AOL lost its competitive position and couldn't extract the expected financial synergies from the deal.
Fast forward to Tuesday, when a federal judge approved AT&T's blockbuster buyout of Time Warner, valued at $85 billion without debt and $108 billion including net debt. Will AT&T (T) fare better than AOL did? The odds are against the phone company: According to McKinsey & Co., nearly 70 percent of mergers fail to generate the revenue boost management expects.
So why is another company shelling out big bucks for Time Warner (TWX) yet again? With Comcast (CMCSA) nabbing NBC Universal in its entirety in 2013 and Verizon (VZ) buying Yahoo, telecoms have been moving toward "vertical integration." Rather than just be a pipe that's delivering content, they want to be in the content business as well.
That's all in an effort to head off the competition from "over-the-top" internet-based media providers like Netflix (NFLX) and Amazon (AMZN), and to fight off the problem of lost subscribers and cable cord-cutting by adding a new source of revenue: digital advertising. Now, wireless and satellite-TV giant AT&T (which owns DirecTV) is set to add CNN and HBO to its stable.
First proposed in October 2016, the deal, when finalized, will mark the 33rd takeover in AT&T CEO Randall Stephenson's 11-year tenure. But to make this one work, he and the rest of AT&T will need to convince millions of people to break with recent media trends and get excited again about pay TV -- even though Time Warner has lost more than a million TV subscribers since the end of 2016.
AT&T's initial plan is to roll out a new offering called Watch, a $15-a-month sports-free online TV package. The hope is access to popular shows like HBO's "Game of Thrones" will encourage cross-selling and service bundling as well.
Another AOL-level culture shock is possible: AT&T is a former utility company based in Dallas, while Time Warner is a media company with operations in New York City and Los Angeles. Red state vs. blue states. Media creatives vs. suited-up telecom types. What could go wrong?