The Warner Bros. Curse : Planet Cash : NPR

Netflix and Paramount are in One Huge Battle After One other to purchase the storied Hollywood studio Warner Bros. (Sure, One Battle After One other is a Warner Bros. film).

This is not the primary time Warner Bros. has been on the heart of headline-grabbing merger or acquisition. Truly, Warner Bros. has a protracted historical past of messy company marriages and divorces. It might be a cautionary story in regards to the risks of mergers and acquisitions. You could possibly even name it the Warner Bros. Curse.

Over the past decade alone, the Warner Bros. Curse has proven itself at the least twice. In 2018, after a two-year regulatory battle, AT&T acquired what was then referred to as Time Warner for $85.4 billion, and renamed the corporate WarnerMedia. Many believed AT&T overpaid for the corporate, and the inventory market by no means appeared to essentially love this deal. WarnerMedia struggled to seek out massive income in streaming, its film enterprise was devastated by the pandemic, and the businesses’ cultures by no means actually jibed with one another.

And so — in a deal that represented tens of billions of {dollars} in losses for its shareholders — AT&T offered shares and ceded management of WarnerMedia to Discovery Inc. The 2 formally merged in 2022, forming Warner Bros. Discovery, which remains to be this Frankenstein of an organization’s title (Frankenstein is one other Warner Bros. property).

Since then, the corporate has made a collection of weird choices, like rebranding its streaming service HBO as HBO Max after which Max after which again to HBO Max. There have been different debacles. Like, regardless of the film being practically carried out — and regardless of the actual fact they’d spent practically $90 million making it — Warner Bros. Discovery shelved BatGirl (and apparently wrote the loss off on their taxes). Extra just lately, the corporate purchased the rights to stream the present Mad Males, and as a part of its launch on the streaming platform, it sought to remaster the collection right into a widescreen, 4K format. However the manufacturing crew apparently didn’t do their due diligence and ensure all of it regarded good earlier than releasing it. The end result: those that watched Mad Males on HBO Max noticed issues just like the manufacturing crew within the body, together with, in a single scene, a technician holding a “vomit hose” as one in every of their actors pretended to throw up. This entire chapter of Warner Bros. historical past has confirmed to be, um, Looney Tunes.

Economists who examine mergers and acquisitions have lengthy puzzled over why so many company marriages go improper. “Examine after examine places the failure charge of mergers and acquisitions someplace between 70% and 90%,” wrote the legendary Harvard Enterprise College scholar Clayton Christensen and colleagues in Harvard Enterprise Overview again in 2011. The story of Warner Bros. is a fairly fascinating case examine to get an understanding of why so many mergers and acquisitions fail.

Essentially the most evident instance of the Warner Bros. Curse occurred on the flip of the millennium. It is broadly thought-about to be one of many worst — if not the worst — mergers of all time. It was so unhealthy that it is nonetheless studied in enterprise colleges.

In the present day within the Planet Cash e-newsletter, we take a look at that disastrous merger. And we ponder some the reason why so many mergers and acquisitions fail.

The merger of the century

In October 1999, Steve Case, the CEO of America On-line (AOL), made a fateful telephone name to Gerald Levin, the CEO of Time Warner.

On the time, Case was solely 41 years previous, however, over the earlier 15 years, he had constructed one of the vital thrilling firms in America. Earlier than AOL, the web was largely a spot for geeks and bureaucrats. Case’s firm had made the web accessible to tens of thousands and thousands of regular People. In 1998, the corporate’s recognition even impressed a zeitgeisty rom-com, You have Received Mail (which, you guessed it, was produced and distributed by Warner Bros.) Within the midst of dotcom mania within the late Nineteen Nineties, AOL’s share value was rocketing via the stratosphere.

However Case was additionally fearful. He was fearful about mounting competitors. He was fearful that the inventory market was in a speculative mania that would not final. And he was fearful what would occur to his firm if there was a crash. AOL did not actually personal a lot when it got here to exhausting belongings and the web was altering quick. Case wished to leverage his firm’s inflated share value, purchase one thing massive and tangible, diversify his firm’s enterprise mannequin, and safe a extra resilient company future. Time Warner had critical enchantment. For one, AOL was more and more moving into the content material sport, and Time Warner provided thrilling mental property to distribute. Much more, Case coveted Time Warner’s sprawling community of cable traces, which might show worthwhile as customers ditched dial-up modems and adopted high-speed web.

Gerald Levin, then again, was disgruntled with the course of his firm. Time Warner was by then a sprawling media conglomerate which, after a collection of mergers and acquisitions, managed media entities like Time journal, Warner Bros. Photos, a report firm, HBO, CNN, TBS, and Sports activities Illustrated. However his firm’s inventory value was underperforming through the dotcom inventory mania. He fearful his firm was failing to thrive on the daybreak of the digital age. He was floundering whereas attempting to usher in Time Warner’s digital future in home, and he yearned for what he referred to as one other “remodeling transaction” — a merger or acquisition — to revolutionize his firm and safe his legacy.

When Case referred to as Levin, he did not beat across the bush. “Jerry? I have been considering: we should always put our two firms collectively. What do you suppose? Any curiosity?” he stated, based on a superb 2004 guide by journalist Nina Munk, Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner.

Levin was , however he additionally performed exhausting to get. “I do not suppose so, Steve. However I will give it some thought,” he reportedly stated.

By then, Case had grown insanely wealthy, had a second marriage he wished to protect, and he had grown bored with the intensive work of being the CEO of his firm. He was now hobnobbing with bigwigs at locations like White Home state dinners and the World Financial Discussion board in Davos, and he was on his technique to a extra comfortable life as an investor, thinkfluencer, and philanthropist. Case was ready to step down as CEO and take a much less time-intensive position as chairman of the board, and he knew precisely what to say to Levin to pique his curiosity: Levin would take the helm of this new company juggernaut.

However Levin was nonetheless cautious. And he had cause to be. Earlier than he had turn into Time Warner’s CEO, Levin had a protracted profession within the decrease rungs of its govt crew. In late Nineteen Eighties and early Nineteen Nineties, when Time Inc. sought to merge with Warner Bros. (then referred to as Warner Communications) and type what would turn into Time Warner, the transaction encountered critical difficulties (the Warner Bros. Curse!). An organization referred to as Gulf & Western — which might quickly be renamed Paramount Communications, and in the present day is called Paramount Skydance — tried to stage a hostile takeover of Time Inc. (Sound acquainted?) That hostile takeover finally failed, nevertheless it value Time a variety of stress and cash — and time — to keep away from it, and Levin fearful this was the start of one other related story.

After some backwards and forwards over the following few weeks, Case and Levin determined to fulfill. They wished this assembly to be a secret. In order that they rented a collection at a resort in Manhattan, close to Time Warner’s headquarters, and spent a night collectively.

They ordered room service for dinner, drank fancy wine, ate chocolate mousse, and dazzled one another. By way of deep philosophical conversations about enterprise and life, they determined they have been simpatico. That evening, they determined they might marry their two companies, forming the world’s largest media and leisure firm.

There have been nonetheless thorny particulars to work out. Like, what share of shares on this new firm would all sides get? AOL had a inventory market capitalization that was practically double Time Warner’s, and its inventory value was rising a lot quicker. However when it got here to the meat and potatoes of precise income, Time Warner truly made way more cash. And it had worthwhile belongings, together with a sprawling array of media properties and bodily cable infrastructure. Levin wished a 50-50 break up in a brand new merged firm. Case rejected 50-50. After months of negotiations, Levin finally settled on Time Warner getting 45% of their new, merged entity.

On January 10, 2000, AOL introduced it was buying Time Warner for $182 billion. It was one of many largest — if not the most important — company mergers in historical past. Once they formally merged, the 2 firms can be value $350 billion. It was a marriage between previous and new media, creating what regarded like an influence couple that may dominate the twenty first century. Many analysts thought it was sensible. The brand new firm promised astounding charges of revenue development.

America On-line Chairman Steve Case (L) and Time Warner Chairman Gerald Levin (R) announce their firms’ merger Jan. 10, 2000 at a New York information convention. The brand new firm can be referred to as AOL Time Warner.

Stan Honda/AFP through Getty Pictures

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Stan Honda/AFP through Getty Pictures

A star-crossed marriage

However virtually instantly, the wedding between AOL and Time Warner turned rocky. Levin had negotiated this deal whereas preserving a lot of Time Warner at the hours of darkness. He had handled his executives and his board of administrators like a rubber stamp. Many felt the deal was rushed and sloppy. From the outset, many executives and staff have been indignant in regards to the merger.

And, as the businesses started to merge, AOL and Time Warner had massive tradition clashes. Time Warner was old fashioned. Its board conferences have been structured and formal. AOL conferences tended to be freeflowing and chaotic. Time Warner’s divisions — from HBO to CNN to Warner Bros studios to its magazines — had operated autonomously. AOL wished them to be underneath extra centralized management, and pursue cross-platform promoting offers. AOL was obsessive about beating expectations, stoking investor pleasure, and juicing their inventory value. Time Warner executives have been much less obsessive about metrics and chasing short-term inventory good points. All sides thought the opposite aspect knew nothing about their aspect of the enterprise. There was a variety of animosity as the 2 groups turned one.

Possibly it could have all labored out in a rosier market. Nonetheless, as luck would have it, the 2 firms negotiated their deal simply three months earlier than the height of the dotcom bubble: March 10, 2000. After that, the bubble began to deflate. It could nonetheless be virtually a yr till federal regulators would approve this deal and make the proposed merger official. Within the meantime, AOL’s inventory started sinking.

The entire deal between Time Warner and AOL was predicated on an explosive charge of development at AOL. However because the inventory market crashed and the economic system turned bitter, firms started slicing again on promoting. Promoting was essential to AOL’s enterprise (and likewise Time Warner’s). In the meantime, AOL’s new subscriber development started to decelerate. And AOL’s inventory descent picked up tempo.

By January 11, 2001, when federal regulators formally accepted of the merger, AOL Time Warner was already in deep trouble. However issues acquired a lot worse after the spring of 2001, when America formally entered a recession. Then got here 9/11, and the economic system acquired even worse.

The newly shaped AOL Time Warner went into panic mode as their enterprise soured. The corporate started doing share buybacks, attempting to sign to the market that their inventory was undervalued (at the same time as its high executives offered shares). They laid off 1000’s of staff and commenced making drastic cuts. They acquired tremendous petty about worker bills, like eliminating free soda and forcing staff to purchase from merchandising machines. Worst of all, AOL executives resorted to cooking their books, attempting to make it seem to be their promoting income was strong when actually it wasn’t.

The unhealthy information for AOL Time Warner stored mounting. Preventing over what the corporate ought to do, the bromance between Case and Levin turned to man-imosity, and Case started rallying their board in opposition to Levin.

The writing was on the wall. On December 5, 2001, Levin introduced he was going to enter early retirement. “I would by no means cried earlier than,” Levin informed Nina Munk, when she was writing her 2004 guide about this company fiasco. “I would by no means cried. And now I cry on a regular basis.”

With Levin exiting, a civil battle broke out throughout the firm. The 2 sides hated one another. Levin’s substitute as CEO, Richard Parsons, would later inform The New York Occasions, “It was past definitely my talents to determine tips on how to mix the previous media and the brand new media tradition. They have been like completely different species, and in reality, they have been species that have been inherently at battle.”

In the summertime of 2002, The Washington Put up acquired a scoop that — each earlier than and after its merger with Time Warner — AOL had been primarily cooking the books, pretending that it was getting extra advert and different income than it actually was. That story impressed lawsuits and investigations by the Securities and Alternate Fee, and AOL Time Warner’s inventory value went right into a free fall.

By the tip of this fiasco, over $200 billion in shareholder worth had been worn out (over $350 billion in in the present day’s {dollars}). The corporate was pressured to pay massive fines. AOL Time Warner ended up firing mainly each senior AOL govt. Below strain, Steve Case resigned because the board chairman. In 2003, AOL Time Warner dropped AOL from its title and, in 2009, formally separated from it. (AOL remains to be round; an Italian tech firm referred to as “Bending Spoons” just lately introduced it was shopping for it for $1.5 billion).

What’s in the present day referred to as Warner Bros. Discovery nonetheless bears the scars — together with billions of {dollars} in debt — from its disastrous merger 1 / 4 century in the past.

Netflix guarantees it’ll keep away from the Warner Bros. Curse

Curiously, Netflix executives, with their eyes set on buying Warner Bros., just lately promised Wall Avenue that, mainly, don’t be concerned, we cannot fall sufferer to the Warner Bros. Curse like so many have earlier than us.

“Plenty of these failures that we have seen traditionally is as a result of the corporate that was doing the acquisition did not perceive the leisure enterprise,” stated Greg Peters, co-CEO of Netflix, on a current name with Wall Avenue analysts, based on Deadline. “They did not actually perceive what they have been shopping for. We perceive these belongings that we’re shopping for, the issues which might be crucial in Warner Bros. are key companies that we function in, and we perceive. Plenty of instances, the buying firm, it was a legacy non-growth enterprise that was on the lookout for form of a lifeline. That does not apply to us. We have got a wholesome, rising enterprise that we’re tremendous, tremendous enthusiastic about.”

However their potential merger with Warner Bros is already off to a rocky begin. Paramount is trying a hostile takeover. The 2 are actually concerned in a battle that might show to be an intense bidding battle, growing the probabilities that Warner Bros. might be concerned in one other ill-fated merger.

What causes so many mergers and acquisitions to fail? One massive cause is that the consumers are inclined to overpay for what they’re buying. There are a variety of potential causes for that. One is said to one thing we wrote about in a current e-newsletter and coated in The Indicator. Behavioral economists have lengthy noticed that winners in auctions — or actually any market the place folks competitively bid in opposition to one another for one thing — are sometimes those who overpay for what they’re shopping for. They name it “the winner’s curse.” In different phrases, the profitable bidders usually win exactly as a result of they’re those who most overestimate the worth of what they’re shopping for.

At coronary heart, company leaders could overpay in mergers and acquisitions as a result of they’re unhealthy at judging what these firms — and what these firms and their firms mixed — will truly be value. There is a well-known perception in private finance that individuals, for probably the most half, should not decide and select particular person shares. The fundamental concept is that inventory costs already mirror out there data, and it is exhausting to beat the market. Possibly that extends even to many CEOs and skilled govt groups shopping for or promoting firms.

If you happen to’re an organization in search of to purchase one other firm, “[y]ou are virtually at all times going to pay extra – usually considerably extra – than the agency is at present value,” writes Melissa Schilling, a scholar on the NYU Stern College of Enterprise. “If you happen to did not, the goal’s present house owners would not promote. Their exterior choice is at all times to carry or promote to a different bidder at a better value. Meaning your acquisition is simply going to repay if you realize one thing the market does not know, or you are able to do one thing considerably higher with that agency’s belongings than its present house owners are doing.”

Apparently, that’s actually exhausting to do. However cocky executives usually suppose they know one thing that the market does not, they usually could overestimate the precise ‘synergies’ that may be discovered when two firms turn into one. Finally, they could overvalue what they’re shopping for or merging to create.

Or possibly firm leaders generally do foresee the actual worth, nevertheless it’s for themselves, and never essentially for his or her staff or shareholders. In a 2022 guide, titled The Merger Thriller, students Geoff Meeks and J. Homosexual Meeks, each of the College of Cambridge, argue that “misaligned incentives” between executives and their firms is one frequent cause why, regardless of a excessive failure charge, so many company leaders are so gung-ho to do mergers and acquisitions. Principally, firm leaders and advisors can usually make enormous sums of cash from M&A transactions — form of like Warner Bros. Discovery CEO David Zaslav has within the transactions he is been concerned with — even when these transactions finally fail to spice up their firm’s income and serve their shareholders and staff.

The advantages for company bigwigs pushing for mergers and acquisitions goes past simply cash. For instance, it can be fairly an ego increase to instantly be accountable for a a lot greater firm or management one thing that will get numerous public consideration.

In the meantime, dealmaking like that is usually hindered by what economists name uneven data. When completely different events in a deal have unequal details about the factor that’s being purchased or offered, it may well result in mispricing and market failures. As an example, possibly the troubles at AOL have been extra obvious to insiders with intimate data about their firm’s efficiency. Had Time Warner gotten higher details about the corporate they have been forming a relationship with — and never rushed via their due diligence in prodding and poking the deal — possibly they might have killed the deal or structured it in a different way.

There are various different potential the reason why mergers and acquisitions can go improper. However the story of AOL and Time Warner’s disastrous merger actually highlights how the precise work of creating two firms into one will be actually messy. Tradition clashes, private animosities, and the complications of implementing new processes, constructions, and techniques will be demoralizing to staff and damage a newly merged firm’s efficiency, detracting from the synergies that the businesses have been initially hoping for.

We look ahead to seeing how this new sequel to the decades-old franchise of Warner Bros. mergers and acquisitions seems. Certain, it might show to be like The Darkish Knight, a business and important success. Nonetheless, there’s a massive threat it might be extra like Joker: Folie à Deux, one other Warner Bros. flop.