A:

While the 1980s on Wall Street were typified by Leveraged Buyouts (LBOs) and hostile takeovers, the 1990s were the decade of mega mergers. Perhaps no company showed this trend better than AOL Time Warner. It seemed like the company was involved on major deals on a yearly basis, and its tale has just about everything that makes a good Wall Street story - even Carl Icahn and Ted Turner.

Right On Time
Time Inc. and Warner Communications Inc. were media companies in two different aspects of the business. Time had solid holdings in magazines and had mostly stayed in its core business. Warner, on the other hand, had already made a reputation for buying unrelated businesses off the cuff and having to sell them later. Warner was the parent company of Warner Bros. Pictures and the Music division, along with holding DC Comics, but it had divested itself of a collectibles company, a video game company, a bank, cable channels - basically a little bit of everything.

When the two companies merged on January 10, 1990, it quickly became clear that Warner's management style, trying to buy growth in new industries, won out. Time Warner quickly bought Turner Broadcasting System, a collection of strong cable assets built up by Robert "Ted" Turner, including CNN. Now considered a media conglomerate in all the traditional outlets, Time Warner's management decided to get into the new paradigm of the internet.

The Time Warner AOL merger was the largest corporate merger in history at that time, worth $164 billion. Coming as it did, in 2001, AOL was at the height of its value in the internet boom and its shareholder actually gained control of the larger Time Warner. The bust hit AOL hard and the new AOL Time Warner had a record breaking loss of $99 billion (goodwill writeoff) to follow up its record breaking merger. Carl Icahn has since become involved as an activist shareholder trying to convince the media giant to break in to smaller divisions that could focus on core businesses. Although he managed to get a stock buyback plan, the mediocre performance of the combined AOL Time Warner persisted even though some of the divisions within are consistently strong. It's a textbook case of the dangers of a company over diversifying and trying to make every business its core business. (Read Biggest Merger and Acquisition Disasters to learn about other unsuccessful mergers.)

This question was answered by Andrew Beattie.

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