AOL Time Warner

The merged corporate entity created in January 2001 when America Online acquired Time Warner for approximately 182 billion US dollars in stock, the largest corporate merger in US history at the time, which dissolved the combined entity into separate companies by 2009.

Background: America Online Before the Merger

America Online was founded in 1985 as Control Video Corporation, rebranded as Quantum Computer Services, and relaunched as America Online in 1991. The company became the dominant dial-up internet service provider in the United States during the 1990s by distributing floppy disks and later CD-ROMs containing its software to virtually every American household.

At its peak in the late 1990s, AOL had approximately 30 million paying subscribers and was generating significant revenue from monthly service fees. The company's stock price rose dramatically during the dot-com boom. In January 2000, when the merger was announced, AOL's market capitalization was approximately 163 billion US dollars.

Steve Case was AOL's co-founder and chairman. Bob Pittman, a media executive and creator of MTV, joined as President and COO in 1996. Case conceived of the Time Warner merger as a way to transform AOL from an internet service provider into a vertically integrated media and content company, with Time Warner providing the content, cable infrastructure, and entertainment assets that AOL could distribute over the internet.

Background: Time Warner Before the Merger

Time Warner, Inc. itself was the product of a major merger: Time Inc., the magazine publishing company founded in 1922 by Henry Luce, merged with Warner Communications in 1989 to form Time Warner, Inc. The 1989 Time-Warner merger was itself controversial and was managed by Steve Ross of Warner Communications and Dick Munro and Nick Nicholas of Time Inc.

Time Warner subsequently acquired Turner Broadcasting System, Inc. in 1995 for approximately 8.5 billion US dollars, adding CNN, TNT, TBS, the Atlanta Braves, and Turner's film library. Gerald Levin, who became CEO of Time Warner in 1992, orchestrated the Turner acquisition.

By 2000, Time Warner was the world's largest media and entertainment company by revenue. Its assets included Warner Bros. film studio, HBO, CNN, Time magazine, Sports Illustrated, Fortune, People, Warner Music Group, Time Warner Cable (one of the two largest US cable companies), and various other assets.

The Merger Announcement: January 2000

The merger was announced on January 10, 2000. Steve Case and Gerald Levin appeared together at a press conference and announced that AOL would acquire Time Warner in an all-stock transaction. At announcement prices, AOL's offer was valued at approximately 182 billion US dollars, reflecting the enormous premium that AOL's inflated dot-com era stock commanded.

The strategic rationale presented to investors and the media was that AOL's internet distribution capabilities and subscriber base could be combined with Time Warner's content, brands, and cable infrastructure to create a dominant force in internet-era media. The concept of distributing Time Warner's content over AOL's online channels, and eventually over Time Warner Cable's broadband infrastructure, was presented as the future of media.

The transaction structure meant AOL shareholders would own approximately 55% of the combined entity, despite AOL having revenues roughly one-fifth of Time Warner's. This was possible only because of AOL's stock market valuation, which was based on speculative expectations of internet growth rather than current earnings.

Regulatory Review

The merger required approval from both the Federal Trade Commission and the Federal Communications Commission, as well as antitrust regulators in Europe. The European Commission approved the deal in October 2000 with conditions requiring the divestiture of Time Warner's stakes in certain online music properties to prevent dominance in online music distribution.

The FTC approved the merger in January 2001 with conditions primarily related to open access for third-party internet service providers on Time Warner Cable's broadband infrastructure, a contested issue among ISPs at the time. The FCC also approved in January 2001.

The deal closed on January 11, 2001, approximately one year after announcement.

The Dot-Com Collapse and Immediate Problems

By the time the deal closed in January 2001, the Nasdaq Composite had fallen approximately 50% from its peak in March 2000. AOL's stock had declined from approximately 55 dollars per share in January 2000 to approximately 35 dollars per share by closing. This meant the actual value transferred in the deal at closing was substantially below the announced 182 billion dollar figure.

Almost immediately after closing, AOL Time Warner faced severe financial pressure:

• AOL's advertising revenue was falling sharply as dot-com companies collapsed and cut marketing spending
• AOL's subscriber growth was slowing as broadband internet began to compete with dial-up service
• Time Warner Cable and other Time Warner divisions were focused on their own capital needs and were not enthusiastic integration partners
• The cultural divide between AOL's aggressive internet culture and Time Warner's traditional media cultures was severe
• Promised synergies from cross-selling AOL internet service through Time Warner Cable's broadband network were not materializing

The FTC's open access requirements complicated Time Warner Cable's ability to offer preferential treatment to AOL. The two companies had fundamentally different businesses and cost structures, and the technologies that were supposed to enable their combination were not yet ready.

The 99 Billion Dollar Loss

In January 2003, AOL Time Warner reported a net loss of approximately 98.7 billion US dollars for fiscal year 2002. This was the largest annual net loss in US corporate history at that time. The majority of the loss was attributable to goodwill impairments: the company was required under accounting standards to write down the value of AOL's assets to reflect the enormous gap between the acquisition price (which was based on AOL's January 2000 stock price) and AOL's actual current fair value.

AOL had been valued at approximately 163 billion US dollars in January 2000. By 2002, its realistic value was a small fraction of that. The impairment charge recognized the accounting fiction of the original deal's valuation.

At the same time, AOL Time Warner also disclosed that it was being investigated by the Securities and Exchange Commission and the Department of Justice for accounting fraud at AOL. Investigators found that AOL had improperly recognized advertising revenue from transactions that inflated its reported revenue in the period leading up to and following the merger announcement.

Gerald Levin retired as CEO in May 2002 and was succeeded by Richard Parsons, a Time Warner executive. Steve Case resigned as chairman in January 2003 under shareholder pressure. Bob Pittman had already departed in July 2002.

Removal of the AOL Name (2003)

In September 2003, AOL Time Warner, Inc. was renamed Time Warner, Inc. The removal of AOL from the corporate name was a public acknowledgment of the merger's failure. Time Warner's board and management concluded that the AOL name had become a reputational liability and that the combined company needed to distance itself from the failed internet strategy.

AOL was retained as a subsidiary but operated as a declining internet service provider, with subscriber numbers falling year over year as broadband replaced dial-up.

Spinoff of AOL (2009)

In December 2009, Time Warner, Inc. spun off AOL, Inc. as an independent publicly traded company. AOL was listed on the New York Stock Exchange under ticker AOL. At the time of the spinoff, AOL had approximately 6.9 million dial-up subscribers, down from approximately 26 million at the time of the merger. The spinoff valued AOL at approximately 2.5 billion US dollars.

Verizon Communications acquired AOL in 2015 for approximately 4.4 billion US dollars. Verizon subsequently acquired Yahoo in 2017 and combined AOL and Yahoo into a unit called Oath (later rebranded Verizon Media and then Yahoo). Verizon sold the combined Yahoo and AOL to private equity firm Apollo Global Management in 2021 for approximately 5 billion US dollars.

Time Warner After 2003

Time Warner, Inc. continued as a media company after the AOL name was removed. The company divested Time Warner Cable (which became a separately traded company and was eventually acquired by Charter Communications in 2016) and Warner Music Group (which went public in 2020 under WMG). Time Warner sold its magazines business as Time, Inc. in 2014.

AT&T announced the acquisition of Time Warner, Inc. in October 2016 for approximately 85 billion US dollars, including assumption of debt. The deal was contested by the US Department of Justice on antitrust grounds in litigation that AT&T ultimately won. The deal closed in June 2018. AT&T renamed the combined media assets WarnerMedia.

In 2021, AT&T announced a spinoff of WarnerMedia to merge with Discovery, Inc. The combination, completed in April 2022, created Warner Bros. Discovery (NASDAQ: WBD), which holds the successor assets to Time Warner's entertainment businesses including HBO, Warner Bros. Studios, CNN, and Discovery Channel.

SEC and DOJ Investigations: The Securities and Exchange Commission and the Department of Justice investigated AOL Time Warner for accounting irregularities at AOL, Inc. In 2005, AOL paid approximately 210 million US dollars to settle the SEC investigation into inflated advertising revenue. Several former AOL executives faced civil charges.

FTC Open Access Conditions: The FTC imposed conditions on the merger requiring that Time Warner Cable's broadband service be made available on open and non-discriminatory terms to competing internet service providers. This condition was intended to prevent AOL from using Time Warner Cable to exclude rivals, but it also prevented the preferential integration that the deal's strategic logic required.

Shareholder Litigation: Shareholders filed multiple lawsuits alleging that AOL and Time Warner management had made misleading statements about the prospects of the merger and the financial condition of AOL in the period leading up to the announcement. Various settlements were reached over subsequent years.