Thursday, September 29, 2005

Time Warner & Microsoft- Strange Bedfellows Indeed

Yesterday's piece by Lee Gomes in the Wall Street Journal regarding technology company M&A activity was quite good. The title of this post borrows part of Mr. Gomes' title, referring to how some strange hookups have come to pass in the sector, to the regret of all but the investment bankers, who were paid regardless of the deals' outcomes.

However, the reason I'm writing this piece is that Mr. Gomes mentioned the current TimeWarner-Microsoft talks regarding sharing control and ownership of AOL.

Can you imagine Bill Gates and Steve Ballmer settling for less than controlling interest in AOL? Do you believe Dick Parsons wants those two controlling one of his major assets? The one which most seriously derailed his company over the past five years? Why are these two companies even considering trying to share control of AOL? TW has mismanaged it since the merger, yet won't spin it off. Would Microsoft seriously pay billions to run AOL without control? This strikes me as a recipe for further disaster for all involved.

I find the whole idea of these two aged titans, TimeWarner and Microsoft, struggling over control of a faded name in the internet product/market space, to be demonstrative of mediocre management. Both Microsoft and AOL were in my equity portfolio of consistently superior-performing large-cap companies in the late '90s. But neither has returned to that level of performance in this decade. Microsoft became predictable and less dynamic. AOL chose its peak market value, based on consistently superior performance, to unload itself to TimeWarner for a share of the latter's more tangible assets, at least on paper.

Gomes is right to point out that rarely do a combination of lesser-ranked competitors in technology sectors ever dethrone a market leader. That is because second-best tech companies are just that, and no amount of critical mass of their products will make them better than the leaders in terms of features, performance, etc.

It didn't happen in mainframes (Sperry, Univac, Honeywell, Nor mini-computers. Nor PCs (how could we forget Carly Fiorina already? Compaq/Dec and HP). Nor software. It is unlikely to happen in online networks.

The prospect should make for some entertaining business news and corporate comedy in the months to come. But I doubt it will create any business which has a chance of attaining the sort of consistently excellent performance we look for in our equity portfolio holdings.

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