An Object Lesson Ignored: Media-Merger Mania Unmasked

There Must Be a Pony in Here Somewhere: The AOL Time Warner Debacle and the Quest for the Digital Future, by Kara Swisher with Lisa Dickey. Crown Business, 306 pages, $24.95

Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner, by Nina Munk. HarperBusiness, 352 pages, $26.95.

Writing a satisfying book about the AOL–Time Warner merger and its aftermath is like getting a laugh from a joke when everybody knows the punch line-and yet the challenge of making this familiar territory seem worth going over again is taken up with gusto in two new books by talented journalists. Though neither author makes a serious effort to tell the broader story about the state of the media industry, the Internet boom and bust, or even why seemingly sensible mergers go horribly wrong, they provide such compelling detail about the train wreck that was AOL Time Warner that you can’t turn away.

The title of Kara Swisher’s book, There Must Be a Pony in Here Somewhere , actually is the punch line of an old joke: It’s what the enthusiastic youth answers when asked why he’s digging in an enormous pile of manure. As Ms. Swisher demonstrates, the sentiment became an unofficial corporate mantra at AOL.

Ms. Swisher’s extraordinary knowledge of AOL (she previously published a well-received history of the company, AOL.com ), accounts for her new book’s strengths and its weakness. Her story about the T-shirts AOL’s business-development team made up is alone worth the price of admission: After the Time Warner team complained during the rushed due diligence that the AOLers were “making it sound as if you’re buying us,” AOL produced shirts emblazoned with the concise reply, “Putz, we are.”

But the AOL-centric nature of both the specific anecdotes and the overall perspective lead Ms. Swisher to miss several key aspects of the transaction’s dynamics. She ends her book awkwardly with a discussion of 13 steps she believes would “fix” the AOL service itself-as if this were the most significant issue raised by the failed deal.

In Fools Rush In , Nina Munk provides more balance and even more juicy detail. Both books do a remarkable job of documenting the fact that the people at the top of AOL knew the jig was up: Their stock price had gotten way ahead of the growth the business had left to deliver. Steve Case and his bankers then undertook a systematic review of how to get out while the going was good. Mr. Case settled on Time Warner as the perfect asset.

Fools Rush In really delivers in its vivid portrait of Jerry Levin, the perfect mark for the con of the century. Brilliant, isolated, arrogant and emotionally fragile after the death of his son, Mr. Levin had become increasingly frustrated with his inability to bring Time Warner into the digital age. Mr. Case drew Mr. Levin in first by feigning a lack of interest in running the combined company himself and then by convincing him (over lots of wine) that “[b]y using the new technology to give people access to news and information, and to one another, Time Warner could reduce ignorance, intolerance, and injustice.” So confident was Mr. Case of Mr. Levin’s commitment to this messianic vision that he felt free to pull the ultimate bait-and-switch minutes before the hastily convened Time Warner board meeting to approve the deal. Not only was he not willing to be a non-executive chairman, Mr. Case told Mr. Levin, but he also wanted a number of the company’s top executives to report directly to him. Mr. Levin relented. During the intervening year before the transaction closed, Mr. Levin pointedly refused to engage with his Time Warner colleagues, who had taken note of the obvious warning signs-the weakness of AOL’s business, the aggressiveness of its accounting-andwere seeking ways to get out of the deal.

The guilty pleasure of watching so many powerful, intelligent people make fools of themselves during the era of Internet euphoria more than compensates for any weakness in either book. Still, it would have been nice if the authors had tried to address directly the basic question of whether this transaction ever made any sense at any price. To be sure, both authors point out that the promised $1 billion in cost synergies was a fantasy figure. But Ms. Swisher, for one, seems to suggest that the merger might have worked if it hadn’t been for certain Time Warner executives-lacking the necessary Internet “DNA or … passion”-who were trying to sabotage the deal. If she really believes this, Ms. Swisher has missed one of the most important lessons of the AOL–Time Warner transaction.

Treating the AOL–Time Warner deal as an anachronism of the boom minimizes the strong similarities between it and bad media deals struck before and since. Ms. Munk correctly highlights the close parallels between this transaction and the earlier merger of Time and Warner. One of the most important similarities is that both destroyed shareholder value: She reminds us that it took Time Warner shares the better part of a decade to achieve the level of the rejected 1989 cash offer of $200 per share made by Gulf and Western (now called Paramount). But there’s a parallel that Ms. Munk neglects to mention: The strategic justifications for both deals were largely spurious.

In addition to the supposed cost synergies, the AOL–Time Warner combination was meant to accelerate AOL’s transition to broadband, to secure significant new cross-media advertising deals and to magically monetize “an awesome 130 million ‘subscription relationships’ in total.” None of this was credible. Time Warner already had a thriving broadband service called Road Runner. If this service had been “blow[n] up,” as Mr. Case wanted, that would have represented a dis- synergy of the deal. SBC Communications very successfully uses Yahoo to market its broadband service-but it doesn’t need to merge with Yahoo to do so. Ms. Munk and Ms. Swisher both effectively highlight how the much-vaunted cross-media deals were few or fraudulent. And given that Time Warner never found much incremental benefit from having both magazine subscribers and cable subscribers, it was always unclear how adding I.S.P. subscribers to its revenue stream would jump-start the business.

Strangely, although the AOL–Time Warner deal has been repudiated, these kinds of “strategic” justifications for media deals in general have not. The recent investor presentation outlining the rationale for the NBC-Universal combination-entitled “Imagine the Possibilities”-was eerily familiar in this regard. Complete with up to $500 million in promised synergies (at least $100 million of which would be “revenue-related”) and the promise that “Content Origination Drives Platforms,” one slide showed a mosaic of the various brands of the combined entity and summed up the strategic rationale in a single word: “Wow!”

One media mogul was recently asked at the “off-the-record” Foursquare Conference why media companies have such a seemingly insatiable desire to make acquisitions. “Bigness sucks less than being small,” he replied.

Media moguls are not alone in making foolish acquisitions or overpaying for sensible ones-but the fact that the media industry has consistently underperformed the market as a whole suggests an unhealthy propensity in this regard. It’s not altogether surprising that businesses predicated on the notion that there’s no such thing as bad publicity rarely see an acquisition that doesn’t seem like a good idea. If AOL Time Warner doesn’t teach media moguls to be more selective in defining the scope of potential “strategic acquisitions,” media investors will continue to hear that giant sucking sound: It comes from their shrinking portfolios.

Jonathan A. Knee is a senior managing director at Evercore Partners and an adjunct professor of finance and economics at Columbia Business School.