Aol Time Warner Inc - The Aol Time Warner Merger

THE AOL TIME WARNER MERGER

When AOL announced its intention to acquire Time Warner, AOL's stock was near its all-time high. In the month following the announcement AOL's stock lost about 30 percent of its value. The announcement caused Time Warner's stock to rise nearly 50 percent before settling back some 20 percent off its peak.

In addition to requiring the shareholders' approval at both companies, the merger had to pass regulatory approval from the European Union, the U.S. Federal Trade Commission (FTC), and the U.S. Federal Communications Commission (FCC). While the merger was being reviewed, both companies undertook actions that would appease regulators. Both promised they would not block other Internet service providers or content providers from using their distribution system. In March 2000 AOL announced it would pay up to $8.25 billion to buy out German media conglomerate Bertelsmann AG's interest in AOL Europe and AOL Australia, a move to allay fears that Bertelsmann and AOL Time Warner would pool their interests to undermine other competitors. Bertelsmann, whose holdings included book publishers and record labels, was considered a competitor to Time Warner, particularly in the music business.

Several companies that were opposed to the merger joined together to lobby U.S. regulators to impose strict limits on the proposed company's business practices. Leading the group was the Walt Disney Co., which benefited from the keyword shortcut of "Disney" on the AOL service and also ran its Disney Channel over several Time Warner cable franchises. Disney proposed that regulators split AOL Time Warner into two companies, one for handling content and the other for handling distribution. Four consumer groups led by the Consumers Union filed a 120-page letter with the FCC expressing concerns about the concentration of power in television and Internet content and their distribution through telephone lines and broadband cable. In May 2000 the National Association of Broadcasters went on record with the FCC opposing the merger and asked the FCC to require that AOL Time Warner not discriminate against properties they didn't own. SBC Communications Inc. also joined the opposition to the merger, expressing concern about AOL Time Warner's interlocking business relationships with competing telephone carriers such as AT&T-Media One and Bell Atlantic-GTE (later reconfigured as Verizon).

Following a lengthy FCC hearing in July, Time Warner announced an agreement in August with Juno Online Services Inc. that gave the Internet service provider (ISP) access to Time Warner's cable subscribers. The agreement was Time Warner's first with an unaffiliated ISP and allowed Juno to offer its services to cable subscribers. As part of the deal the two companies would split the Internet access subscription revenue from the service.

The AOL Time Warner merger was also being scrutinized in Europe by the European Commission (EC), the antitrust regulatory body of the European Union (EU). Following a hearing in early September, AOL and Time Warner issued a list of concessions designed to win approval from the EC. The concessions focused on the EC's primary concern about discrimination in the delivery of online music. In general, the EC, like U.S. regulatory agencies, was concerned that AOL Time Warner would discriminate against competitors seeking access to its content and Internet services. To satisfy the EC, Time Warner agreed to call off its planned merger with British music company EMI Group PLC. Within a week the EC approved the AOL Time Warner merger.

Meanwhile, the U.S. House of Representatives was holding hearings on the proposed merger, and the FCC said it would wait until the FTC issued its ruling first. By November it was clear that the FTC wanted proof in the form of a cable-access agreement with a rival ISP before it would approve the merger. In November Time Warner and Earthlink, the second largest ISP in the United States, reached such an agreement. Under the agreement, Earthlink would be allowed to offer its service over Time Warner's high-speed cable lines starting in the second half of 2001.

The FTC gave its approval to the merger on December 14, 2000. Focusing on Time Warner's vast cable television network, the FTC required that Time Warner open its cable lines to ISPs that competed with AOL, in effect turning Time Warner's privately owned system into a kind of public channel for Internet access, much in the way telephone systems were treated under the telecommunications regulatory reforms of the middle and late 1990s. In addition to the agreement with Earthlink, AOL Time Warner was required to make deals with two other competing ISPs within 90 days of making AOL available to Time Warner subscribers in large markets. Such deals would also require the approval of the FTC. The FTC requirements were to remain in effect for five years.

FCC approval, with some additional conditions, quickly followed in January 2001. The value of the merger was estimated at approximately $110 billion, with AOL's stock trading at about half of its value at the time the merger was originally announced. The new company began business with about 88,500 employees.

Prominent figures from both companies were chosen for the executive team, but some favor was given to the acquirer, AOL. Steve Case became chairman of the new company, while Time Warner's chairman Gerald Levin was named CEO. Ted Turner was named vice chairman; however, within a year he was forced out of that role in a board reshuffling.

The executives put in charge of integrating the two companies included Kenneth Novack, AOL's vice chairman; Bob Pittman, AOL's president; Richard Parsons, Time Warner's president; and Richard Bressler, Time Warner Digital Media CEO. While AOL Time Warner's new headquarters would be located in New York City, Case and many other AOL executives would remain at the AOL campus in Dulles, Virginia. Board meetings would alternate between the two locations.

For the future, the company's management announced four priorities:

• to transform the consumer experience and reinvent the way people communicate, do business, inform, educate, and entertain themselves
• to become a truly global company
• to foster an entrepreneurial culture and function as one company
• to act in the public interest and make a difference, both locally and globally, in the communities where AOL Time Warner operates.