America Online is buying Time Warner for $166 billion. The market is cheering.
In fact, this is the dumbest merger ever.
Time Warner is doing this mainly for bureaucratic reasons. Vice Chairman Ted Turner was in line to run the company after the current chairman, Gerry Levin, retires, and the suits in New York couldn’t stand that. Also, they didn’t have an online strategy because they’d frittered it away in meetings.
AOL is doing this for survival reasons. Its market share is falling, it wants someone else to pay for its international expansion, and who cares if they’re valuing Time Warner at a nearly 100 percent premium to its actual market value? It’s only stock, right?
Let’s assume this deal gets done. How many decisions will reach the boardroom? That’s right, very few, which means most business managers at AOL Time Warner will be divorced from the market. Is an Atlanta relief pitcher named John Rocker causing trouble? Fire him, and so what if the Braves lose games and money, the team is a pimple on the balance sheet, and image means more. Or, keep him because that’s Turner’s fiefdom, which is an even dumber basis on which to make a decision.
What about decisions that must be made in the boardroom? AOL thinks it can force Time Warner to build its international marketing, but Time thinks it can make AOL pay for its cable upgrades. Can they do both? Not if the stock price falls – and with this kind of dilution a fall is certain.
What is most likely to happen? Time’s suits figure they’ll do to Steve Case what they did to Ted Turner: Give him the bureaucratic runaround until he backs off in disgust. Case and Pittman figure they’re the acquiring company, but strength in the boardroom is measured by how your units are doing, so it’s in the interest of the Time suits for AOL to do badly. The Time suits can make anyone do badly – ask Ted.
That’s the problem with deals that seek to insulate businesses from the marketplace. Everything becomes politics, organized by committee. People rise by serving the organization, not the market. If you want a name for such people, they’re called bureaucrats. We suffer them in government because we must, and we hope the process (democracy) will keep them in check.
In the public sector what happens is bureaucrats keep government running while the process becomes perverted and only big money can make anything move. We seem to have more control in the private sector where the “election” happens every day, but these kinds of mergers are designed to frustrate that process by insulating the bureaucrats from market pressure.
The good news is this never works. There are fashions in business as there are fashions in politics and the arts, and today’s fashion is the “media conglomerate.” Conglomerates didn’t work in the 1960s, they didn’t work in the 1980s, and they won’t work now. If I owned stock in either one of these companies (which I don’t) and if I seriously advised people on what to do with their money (which I won’t), I’d say sell. This one will be unwound as soon as the fashions change.