Mergers and acquisitions do not always achieve the value-creation and transformation objectives that management outlines. While some mergers, like the Kraft Heinz example, come about through strong strategic planning and great synergies, that’s not always the outcome. Take the case for the acquisition of Time Warner Inc. by AT&T in June 2018. Originally announced in October of 2016, this proposal would initiate a vertical merger between a large U.S. telecommunications operator and one of the largest media content companies in the world. AT&T was aiming to create a fully integrated communications and media platform, combining premium content with its distribution and data analytics to compete with other giants like Netflix, Google, and Amazon (Glass & Rutgers University, 2021). While this deal looked powerful on paper, in practice, it wouldn’t live up to its expectations.
Leading up to the acquisition, Time Warner was seen as an asset. It owned content such as HBO, Warner Bros., and Turner channels, and was expected to be a good integrational fit with AT&T. It consistently saw revenues in the $20 to $30 billion range (See Appendix C). The firm had a healthy level of debt and was experiencing adequate liquidity to cover it. Overall, pre-acquisition Time Warner was a prominent media company with strong brands, a large customer base, and robust content libraries (Glass & Rutgers University, 2021). This leads to the conclusion that the failure of the deal was not in the state of the companies prior to the merger, but in the management of the deal.
Between 2016 and 2018, this deal was wrapped up in a lengthy antitrust challenge by the U.S. Department of Justice and was eventually allowed to proceed. Time Warner engaged in a voluntary delisting, renaming it to WarnerMedia, and becoming a wholly owned subsidiary of AT&T. In total, the deal was valued at approximately $84.5 billion. This does not include the assumption for Time Warner’s debt, which raises the value to $105.8 billion (AT&T-Time Warner Merger Overview, n.d.). The payment at the time of deal close included at least $38.5 billion in AT&T common stock and $42.5 billion in cash (“FORM 8-K,” 2018).
As stated previously, the goal was to vertically integrate content with the means of distribution on a mass scale. Management at AT&T assumed that this would create a sort of feedback loop. If AT&T were to engage in targeted advertising focusing on increased subscriptions, revenues would grow. While sound in theory, competitor streaming services were able to engage in effective advertising without owning telecom infrastructure, thus leaving AT&T unable to protect itself from competitors (Glass & Rutgers University, 2021).
Additionally, AT&T expected an increase in bargaining power and cost efficiencies across the company (“FORM 8-K,” 2018). However, to fund the deal, AT&T had to substantially increase its additional borrowing. Already, AT&T’s stock prices had been trending lower over the years before the merger. Immediately following the deal close, Moody’s and S&P Global Ratings lowered AT&T’s credit rating significantly, indicating it as a much riskier borrower. This was in response to AT&T’s net debt exceeding $180 billion at this time (See Appendix B). As a result, AT&T faced financial inflexibility. Instead of being able to invest in innovation, cash had to be devoted to handling its debt. Around this same time, AT&T was underperforming in comparison to competitors in its original field, such as Comcast (Glass & Rutgers University, 2021).
There was also a difference in cultures between the two preexisting companies. AT&T’s culture was true to its roots; it reflected that of a regulated communications utility. There was an emphasis placed on engineering, control, and formal processes. In contrast, Time Warner had a culture aligned with the entertainment industry. It was one of creative talent, experimentation, and rapid response to consumer tastes. After the deal closed, key executives from Time Warner began to leave the company. Additionally, John Stankey, a long-standing employee of AT&T, was put in charge of managing the new WarnerMedia, which led to feelings of forced cooperation between the former companies. This cultural clash led to increased agency costs, miscommunication, and internal friction, leading to a stressed work environment, stressing synergies, and leading to the decision to split WarnerMedia from AT&T just three years later (Glass & Rutgers University, 2021).
Recommendations to Avoid Deal Failure
Discuss what went wrong and how the failure could have been avoided.