The worst deals ever

AOL–Time Warner: the merger that destroyed $200 billion

At the peak of the dot-com bubble, a dial-up internet company used its inflated shares to buy the world's biggest media empire, and the combined company lost about $99 billion in a single year.

On January 10, 2000, a 15-year-old online service said it would buy the owner of HBO, CNN, Warner Bros. and Time magazine. It was hailed as the deal of the century, the moment old media and new media finally came together. Within three years the combined company had posted the largest annual loss in American corporate history, and within ten the two companies had split apart again.

Watch the story

▶

The deal

On January 10, 2000, America Online announced it would acquire Time Warner. Time Warner was the much bigger business, with more assets and more revenue, but AOL was the buyer. That tells you most of what you need to know about markets in early 2000. Sources put the price at different figures. The most common is about $165 billion in stock. Counting Time Warner's debt, the figure was about $182 billion, which made it the largest corporate merger in U.S. history. Some accounts value it at $108 per Time Warner share, or roughly $180 billion. In today's money, $165 billion is very roughly $300 billion. AOL paid entirely in shares. Both companies merged into a newly created holding company, AOL Time Warner. AOL holders received one new share for each AOL share. Time Warner holders received 1.5 new shares for each of theirs, which meant issuing about 2 billion new shares. AOL shareholders ended up owning 55% of the new company and Time Warner shareholders 45%. AOL's Steve Case became chairman and Time Warner's Gerald Levin became chief executive. The deal then spent a year with regulators. To win approval in Europe, Time Warner dropped its planned merger with the British music company EMI. In the U.S., the Federal Trade Commission required a deal giving a rival internet provider access to Time Warner's cable network. The FTC cleared the merger on December 14, 2000, and it closed on January 11, 2001. By then AOL's stock had fallen sharply, and the deal was worth only about $110 billion.

By the numbers

At announcement, the combined company was worth an estimated $350 billion. By the time the deal closed a year later, that had fallen to about $205 billion. Then came the write-downs. In 2002, AOL Time Warner reported a net loss of $98.7 billion, compared with $4.9 billion in 2001. That included a $54.2 billion charge from an accounting rule change that forced the company to mark down the inflated value it had carried for the merger, plus an operating loss of $32.5 billion. The loss per share was $22.15. The final count is worse. The merger is widely estimated to have destroyed about $200 billion of shareholder value as the bubble burst. When Time Warner spun AOL off in December 2009, giving shareholders one AOL share for every 11 Time Warner shares, AOL was worth roughly $3 billion. That was more than 97% below its peak, and Time Warner itself was worth less than $40 billion. Thousands of employees lost their jobs along the way.

Why it failed

The idea depended on AOL's dial-up service remaining the main way people got onto the internet. It didn't. Broadband from cable and phone companies took customers away, AOL was slow to adapt, and its subscription business began to shrink. The source of the stock that had paid for the deal was declining. The promised synergies never materialized. Plans to sell Time Warner content through AOL largely failed, and sometimes Time Warner's famous brands were hard to find on AOL at all. The units continued to operate largely on their own. Time Warner was used to running its divisions as independent fiefdoms, while AOL had an aggressive, sales-driven culture focused on short-term results. The two never integrated. Then the dot-com bubble burst. Online advertising collapsed, and AOL was later found to have inflated its advertising revenue, which led to SEC penalties. Shareholders largely blamed Levin for letting Time Warner's stable old-media businesses be taken over and pulled down by a failing internet unit. He resigned in December 2001, and CNBC later named him one of the worst American CEOs of all time. Case left the board in October 2005 and later argued the merger should be undone. Jeff Bewkes, who ran HBO and later became Time Warner's CEO, spent years separating the two companies before AOL was finally spun off in 2009.