AOL / Time Warner Post Mortem: Overlooking the Future, And the Moat

Includes: AOL, TWX
by: Nadav Manham

From the New York Times. Ten years later, the main players look back. So do I, and here is what I conclude:

1) Steve Case is not allowed to say this but merging with Time Warner (NYSE:TWX) was a great move for AOL shareholders. In hindsight those shareholders should have sold their AOL shares at the pre-merger top but Case had a fiduciary duty to whoever would have bought them. Case did the next best thing: he took a super-inflated currency and on behalf of his shareholders used it to buy something pretty substantial. Had AOL stayed independent, it would be worth zero today.

2) On the other side of the deal, those who exchanged something substantial for AOL's super-inflated currency . . . do not belong on the BMMT Dream Team.

3) I've never heard so many flaky and fake-mystical justifications for the massive reallocation of other people's capital:

"Unleash immense possibilities for economic growth, human understanding, and creative expression"

"vision of of how to combine AOL with a more traditional company in creating what at the time was going to be perceived as a company of the future."

"philosophically people were beginning to understand that the digital world was a transformational universe."

I guess it was not good enough to simply say "This merger will increase the per-share intrinsic value of the company."

4) I adore Ted Turner; he's one of my favorite entrepreneurs and philanthropists and I love Ted's Montana Grill and everything. But when it comes to cold-eyed calculation of the investment merits of a deal, I must say his former arch-enemy (and current Dream Team Member) Rupert Murdoch (NASDAQ:NWS) has him beat.

5) A little armchair psychoanalysis: Each member of BMMT Capital Partners (with the possible exception of the Thomson family, which I know less about) has deliberately set himself up outside the New York-based Establishment. One of them lives in Omaha and hates to leave. Another one lives the lone cowboy/lone sailor life in Colorado and Maine. The third is a proud conservative among liberals. I speculate that this set-up is not unrelated to their ability not to get caught up in the kind of mass hysteria that led to the Time Warner-AOL merger.

Update: I forgot the most important part, the part about moats. Much of the futurology that went on surrounding the merger was right-on. Here is the FT:

The future they have glimpsed is one in which consumers and employers live in a permanently connected world. Broadband communication networks would pipe all manner of information and entertainment to television sets, personal computers and other appliances not yet imagined. Ubiquitous wireless gadgets would make it possible to work, communicate and be entertained from anywhere . . .

Not a bad prediction. But it's one thing to predict the future in business, and its another thing to predict the incidence of that future on the relevant participants. In other words, who gets to make money from this future we're all envisioning? Who is going to have a moat? That was the main missing ingredient--no one ever asked "Does our merger partner have a moat? Will it be able to make money from the future?"