A Case Against Mergers

AOL Time Warner? Dumbest merger ever. Dismantle it.

That’s basically the point of an op-ed piece in the December 11th edition of The Washington Post. It’s not the most earth-shattering suggestion except for one detail: The person suggesting the breakup is Steve Case, founder of America Online.

“How this widely heralded ‘merger of the century’ quickly became widely derided as the ‘worst merger in history’ has been the subject of considerable commentary,” Case wrote, adding that he has his own opinion about what went wrong but wanted to focus on what to do about it.

Case said in October he was leaving Time Warner’s board to focus on his new investments and to avoid any potential conflicts of interest. His investment company, Revolution LLC, owns yoga, acupuncture and other health-related TV programs as well as a ritzy spa near Tucson, Ariz., and Exclusive Resorts, which markets luxury vacation rentals.

Case thinks the conglomerate should be divided into four standing companies – Time Warner Cable, Time Warner Entertainment, Time Inc. and AOL – each with its own strategy, stock, balance sheet, management team and board. His thoughts have already been voiced to the top-brass at Time Warner, he added.

“The success that Warner Music has had since being spun off from the parent company is an example of how this strategy can deliver value for all stakeholders. When Warner Music was part of Time Warner, it was – much like AOL – seen as a business in decline, a troubled division with a glorious past but a questionable future,” Case said.

“But since being separated, Warner Music has increased in value by cutting bureaucracy, signing new artists and investing more aggressively in digital music. The private equity firm buyers have already recouped their initial investment … .”

The AOL merger with Time Warner was expected to launch both companies into new media, and the shared technology would benefit both. Instead, roadblocks kept the companies from integrating with lethal results, namely watching Yahoo! and Google gain momentum and eventually lap America Online. The stock took a tumble and AOL was erased from the company name.

With the separation, Time Warner Cable could aggressively compete with Verizon and AT&T cable, Case argued. Time could expand from being a group of traditional magazines to a multifaceted media machine. The same holds true for the other two companies, and stockholders could move their funds to whatever company fits their bill rather than invest in the whole kit and kaboodle.

“We respect Steve’s views as a shareholder,” Time Warner said in a statement. “As Steve is aware, these views have been carefully considered by Time Warner’s board and management, together with outside advisers …. .”

The reader can probably deduce where the statement is heading: It ain’t gonna happen.

Time Warner actually looks to be in much better shape than it has been since the turmoil that followed the merger with AOL. The company is on more solid footing with investors and AOL’s fortunes are on the upswing following a recent strategy shift.

Case relinquished his role as AOL Time Warner chairman two years ago but still holds .04 percent of the company’s stock.