What makes a bad deal? AOL-Time Warner

Not every deal that is negotiated turns out to be good for either or both parties. In an article published Saturday, the United Kingdom newspaper Telegraph dissects what it calls the worst deal in business, the AOL-Times Warner merger. (Read the whole article here: http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/6622875/Final-farewell-to-worst-deal-in-history—AOL-Time-Warner.html)

The AOL-Time merger happened back in 2000, and brought together a large media company with a leading internet company. But the deal went badly. Today, AOL and Time Warner have been separated, and both are facing challenges, including recently announced layoffs at AOL.

The Telegraph article explains the reason for the merger:

“Although each of the two original companies had its own reason for merging – AOL wanted broadband capability from Time Warner Cable and additional content to use across its sites; Time Warner desperately needed a way to digitise its content and reach out to a new online audience – neither strategy was played out in practice.”

But, according to the Telegraph article, there were several problems during the negotiation that led to the disastrous merger.

1) Not knowing enough about the other party

The Telegraph reports that Steve Case of AOL and Gerald Levin of Time Warner:

“… knew little of one another – and arguably of one another’s businesses – before they struck the deal. An aging Levin, a lawyer by training, had worked his way quickly through Time Inc’s corporate ranks, and while aware of the need to have an internet strategy, had little idea of the best way to get one.”

2) One party dominates the other/Unwillingness to cede control

“In the negotiations for the deal, Case used AOL’s larger market value to dominate Levin…. Case became chairman and Levin chief executive in charge of operations. Neither man wanted to cede control.”

3) Questionable motivations on each side

“…the deal was motivated not by logic or strategy but by egos.”

4) Not recognizing or dealing with culture and management differences

Can you draw any other lessons from the AOL-Time Warner deal? Do you think any other big merger deals will face the same fate?

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