Three years ago Steve Case was at the top of his game, standing on a stage slapping high fives with executives of Time Warner and announcing the biggest media merger in history.
A year later the merger had become reality. AOL Time Warner executives predicted phenomenal growth and profit-boosting synergies.
By January 2002 the synergies were still in the future. Executives lowered earnings estimates for the second time in four months.
Last week Steve Case resigned as Chairman of AOL Time Warner.
The story of Steve Case and the AOL Time Warner merger is a story of many things. It is a story of entrepreneurship and hubris. It is a story of the great Internet bubble and the mythical New Economy. And it is a story of why mergers are a lot like marriages. Those stories begin in an upscale Honolulu suburb.
Unlike the great rags-to-riches entrepreneurs of the Nineteenth Century the entrepreneurs of the Digital Age seem to come mostly from economically comfortable beginnings. That gives them a confidence and an easy, early familiarity with the language and customs of business and law.
Steve Case is a fifth-generation islander. His father was a successful corporate lawyer who moved his family into a small cul-de-sac in the Manoa Valley section of Honolulu. Friends who remember Steve from his youth mention three things.
They remember that he was shy, often preferring gadgets and ideas to contact with people. That trait persists today. AOL workers nicknamed Case "The Wall" because of his habit of listening with a face that betrayed no emotion.
Boyhood friends also remember a fierce competitiveness that showed up in everything Steve and his brother Dan did. It might be basketball or croquet, but it didn't matter. "We figured that as long as we were out there and playing, we might as well win." Steve Case says. One of the things they were out to win at was business.
That's the third thing they remember. Steve was always starting some kind of business. His first business ventures all were partnerships with brother Dan. There was a limeade stand at age six. Later the brothers started Case Enterprises which sold seeds and greeting cards and watches.
The entrepreneurial drive didn't go away when Steve went off to Williams College. His grades were never the best, but "He was that guy from Hawaii who was always trying to sell stuff," according to one classmate.
After college there were stints with Proctor and Gamble and Pizza Hut. In 1982 while he was living in Kansas he discovered what was then the online world. He bought a Kaypro computer and all the gadgetry needed to hook it up to a phone line and start exploring the computer bulletin board systems that were starting up then. His experience would shape his later goals for AOL.
Steve loved gadgets and he was very bright and tenacious. Even so it took and immense amount of time to get all the equipment to work together. He was paid back by the excitement of connecting his computer to the world. He would remember both parts of that experience later, working to share the excitement of going online by making it easy for others to do.
The AOL adventure began in 1983. Case moved east to work for a company called Control Video. The plan was for the company to make Atari video games available to people over phone lines hooked up to their computers.
When that company failed, Case and a fellow named Jim Kimsey began Quantum Computer Services. The company started with a service called Q-Link for Commodore Amiga customers and later developed AppleLink.
In 1989 Quantum became America Online and things began to move. America Online went public in 1992 and by 1994 had signed up one million subscribers. It just kept on growing. By 1996 there were 5 million subscribers. That jumped to 10 million a year later and reached 20 million before merger talks started with Time Warner. By then Case already had experience in taking over big rivals.
Compuserve was the major online service in the days when AOL was just starting out. In 1998 America Online bought Compuserve.
Netscape was the dominant player in the early years of the browser market. Netscape staff sneered at AOL as just "the Internet with training wheels." In 1999 AOL bought Netscape.
Over and over during this time Case amazed his detractors and industry analysts. He overcame technical problems like not having enough modems to satisfy demand. He took a big risk and went to flat-rate pricing. It paid off. Case was right again. And the analysts were wrong.
AOL was spectacularly good at two things. To start with they made it easy for people to get online. Folks who had never tried to go online before could pop one of those ubiquitous AOL disks in their computer and, without help or manual, they could get on the net, at least AOL's version of it.
AOL was also great at marketing that service and that ease. A lot of the credit for that belongs to a woman who joined Case at AOL right after the company went public. Jan Brandt brought a solid direct marketing background to the company and crafted the plans, along with those mailings of millions of disks, that helped AOL move up to 30 million plus subscribers.
That's the situation when we get to the AOL Time Warner merger. Case has come from virtually nowhere. He's proved the skeptics wrong. He's done a couple of mergers and they've seemed to work. But then, pretty much everything was looking like it worked then, in those heady days of the Internet Bubble.
The problem was that Time Warner was a very different beast than the companies that AOL had acquired so far. It was a lot bigger and a lot older.
When the firms announced their intention to merge, on January 10, 2000, Time Warner was generating five times more revenue than AOL. But AOL was buying Time Warner and retaining 55 percent of the ownership. How could that be?
The answer lies in the craziness of the Internet Bubble where stock prices and capital valuation soared beyond all reason. And AOL stock was worth more than Time Warner stock. A lot more.
Plus AOL was a New Media, New Economy company. Time Warner represented the old versions of both. In the language of that time calling something "New" was akin to pronouncing it good, while calling it "old" meant that you'd better start making funeral plans.
After all Time Warner already tried in several ways and at several different times to get into the New Media part of the world. The attempt that most New Economy folks were most likely to laugh at was something called Pathfinder.com
Pathfinder.com was a giant Web site that was supposed to showcase Time Warner and sell the content of its magazines. It was an awful site and a worse business plan. Pathfinder seemed to prove that the old economy/media folks just didn't get it.
In theory what was going to happen was that AOL would buy Time Warner and then the combined company would reap all kinds of benefits. AOL would have access to Time Warner Cable, the second largest cable TV company in the US. Time Warner products like magazine content and movies and music would be promoted and even distributed over AOL.
It looked great on paper. Most mergers do. But most mergers fail.
You can pick your study. A KPMG study found that more than half of all mergers destroy shareholder value and another third make no difference at all. A Business Week study puts the failure rate at 61 percent. There seem to be two main causes of failure: process and fit. The AOL Time Warner merger had both. It cost shareholders about 80 percent of the value of the combined company on the day of the merger.
The merger was done in a frenzy as if the deal had to be done before midnight or everyone would turn into a pumpkin. For a good merger there needs to be due diligence, a good process that assesses benefits and risks, that challenges assumptions and that details just how the combined company will deliver more value. That simply didn't happen. Everybody seemed to want to do the deal. No one seemed willing to question it.
But the biggest reason that mergers fail has to do with people issues. Towers Perrin surveyed 447 human resource executives from large companies about this in 2000. They concluded that people issues, mostly culture, provide the top seven reasons why mergers fail.
Mergers are a lot like marriages. You're going to be with someone for life. It's better if you get along.
In some ways the merger of AOL and Time Warner was like the marriage of a teenager to a middle aged banker. The cultures were vastly different. There were open collars and jeans at AOL. Time Warner was more buttoned-down.
The personalities seemed to clash, too, especially among those at the top. That meant that when tough times came, as they did when advertising revenues went south, there was no glue of loyalty to hold things together. Gradually, the folks who'd made the merger happen left for other things. Steve Case stayed, but he was more and more isolated.
The Time Warner folks had a huge advantage when things came down to intramural warfare. They'd worked together for years. They had loyalties to each other. AOL folks didn't have that history with each other and it hurt them in the corporate infighting. Many of them disappeared, too, the way that old Netscape and Compuserve folks had disappeared from AOL after those mergers.
Finally Steve Case was left, the last of the New Economy guys still standing, isolated in a corner office. Now it's time for Steve to assume a classic historic role. It's the role of scapegoat. All the blame for all the mistakes will be heaped on him and he will be sent away into the wilderness.
Don't worry too much about Steve, though. He's heading into the wilderness pretty well heeled. He's already made over $500 million from selling stock over the last decade. His current Time Warner holdings are worth around $170 million. So money won't be a problem.
It probably won't be the last we see of Mr. Case. He's still young at 44. He's resilient. And he'll be back.
Created/Revised/Reviewed: 20 January 2003
RESOURCES
AOL Time Warner's corporate Web site
Here are some resources that can help with understanding mergers and corporate culture.
Deal and Kennedy wrote the original book Corporate Cultures many years ago. It ages well and I like it better than their "updated" version.
Even though it's not specifically about corporate culture I find Edward Hall's book The Silent Language very helpful on these issues. Hall uses the term "culture" to describe "that part of a man's behavior that he takes for granted--that part that he doesn't think about because he assumes it is universal."
Here are two articles on the web that directly address corporate culture.
There are four sites that I've found offer a number of insightful features and report out on studies that affect all aspects of business. Rather than try to scour those sites for articles that will interest you, I recommend the sites as a whole and direct you to their search tools.
The McKinsey Quarterly: the Online Journal of McKinsey and Company
Strategy + Business is an online journal of Booz Allen Hamilton
HBS Working Knowledge is a great connection to an awful lot of the interesting stuff passing through that university and related to business.
Coletta and Company publish a Trend Digest that will give you pointers to lots of interesting surveys, studies and opinions.
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