The AOL-Huffington Post Deal

In Monday's post, I commented dismissively on AOL buying the Huffington Post with this passage,

"AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?"



Since then, various pundits have weighed in on the deal. Tim Armstrong and Arianna Huffington appeared on CNBC to tout the deal. Armstrong somewhat disingenously claimed there was "no risk" to the deal, while Huffington claimed that those who took AOL stock would outperform the cash recipients. This despite some observers chortling that the HuffPost owners had learned from TimeWarner-AOL and demanded mostly greenbacks this time.

As the Wall Street Journal noted,

"No doubt Huffington Post Chairman and co-founder Ken Lere, an AOL veteran who saw the Time Warner nightmare firsthand, knew the dangers of accepting too much stock in AOL."

Regarding Armstrong's claim, check out the nearby price chart showing that the new AOL has languished since its inception. Armstrong, I am sure, badly hopes that the Huffington Post's readership can work magic on AOL's ad revenues. Putting Arianna in charge of a bigger chunk of content? Who knows how that will turn out? She's known for liberal politics, despite what Armstrong yammered about new content 'beyond left and right.'

Given the only-recent profits realized by Huffington, and just a $50MM revenue estimate for FY2011 for the online media property, the $300MM in cash plus $15MM of AOL equity seems a pretty rich price. I always wonder, in these situations, why the acquirer doesn't just form a marketing alliance, exchanging cash for product and/or access? Thus saving shareholders' the risks of actual acquisition, while extending financial benefits to the media property, and forcing continued performance for the deal to continue.

But, as I noted in my initial comment, so what? What's really clear is that the four owners of Huffington got a nice $300MM for a recently-, barely-profitable online business. Sounds a lot like TimeWarner-AOL, only one company removed, doesn't it? What AOL gets is anybody's guess. But investors clearly didn't like the deal. And it's going to take a lot to get AOL anywhere near the S&P since its rebirth.

Personally, I don't think Armstrong and the addition of the Huffington Post properties, including Arianna herself, are going to do the trick.

More Reflections On AOL, TimeWarner, & Steve Case's Understated Brilliance

On Monday, I wrote this post regarding the appearance of both Steve Case and Gerald Levin, the co-architects of arguably the absolute worst merger in the past 10 years.

As I discussed the post, and the event, with my business partner over lunch yesterday, more nuances came out which I honestly don't think I've ever seen mentioned about the ill-fated deal.

What I wrote earlier this week,

"Let's be really frank here. In 1999, nobody wrote blogs, and I didn't write this one. But at the time, I verbally declared to all who would listen that the TimeWarner-AOL merger was simply a case of the latter cashing in on its temporary valuation surge, at the expense of the former. Nothing more, nothing less.


There was zero business reason for the merger. I immediately sold the shares I held by virtue of my AOL position when the merger closed.

Levin isn't some accomplished graybeard former CEO. He is a failed wannabe-CEO. Steve Case induced Levin to snooker his own board and rob his own shareholders' wealth to give it to investors in AOL."

My partner asked whether I thought AOL, now spun off, had actually declined in value by more than, say, Yahoo, from its 1999 highs.

As the nearby price chart shows, Yahoo is down significantly from its 2000 high. For purposes of this post, a rough estimate is sufficient. It looks like Yahoo peaked in 2000 at around 100. Today, it's trading at 16-17. That's about a 84% decline on the $50 base.

By 2002, one news article of the day noted that the combined AOL-TW had already plunged by some 70% in value.

Looking at the TW price chart, we see the company's equity price fell from the $300 range to around $29 now, ex-spin off of the remaining stump of AOL. The per-share numbers for the old and new AOL wouldn't be meaningful, until adjusted for number of shares, so a straight market value comparison would be appropriate.

However, here's where the real genius of Steve Case becomes apparent. When we got to this point, I suggested to my business partner that there wasn't really much point in comparing the two values, because cable internet access had, would have, destroyed the core value of AOL anyway.

And this is where you have to give Steve Case credit far, far beyond what anyone has even hinted at so far.

As my colleague and I discussed why we were members of AOL back in the 1990s, we agreed it was the simplicity of access. The site's content was never very important to either of us. In fact, as we remembered those days, I pointed out that the content was added mostly as a freebie to give subscribers something more than bare-bones dial-up access. It differentiated AOL from the other ISPs of the day which only provided simple web access and an email address.

But by 1999, any really smart industry player or observer could see that AOL's very success was already about to undermine its business model. To wit, the huge subscriber base it had created was rapidly learning to stay logged in all day.

Remember when modem speed was an important feature on your desktop PC? When your local phone company had to create new area codes just to generate new telephone numbers for second phone lines dedicated to online access? I cancelled mine only about seven years ago, when I elected to use my main landline as a dial-up backup access mode, should my high-speed cable connection fail.

Who even bothers with that anymore? How many are already just closing their landline accounts?

So, back to AOL and Steve Case.

By 1999, I think Steve Case already saw the flattening of growth in AOL's subscriber base, as people began to migrate to their local cable television's high-speed internet service. Even if AOL's membership and revenue hadn't actually declined, the slowing of its growth would have immediately poppled the company's equity price bubble.

Remember, we're talking about the final days of the famed 'tech bubble' in equity markets.

I think Steve Case, by early 1999, or perhaps even mid-1998, knew he had about 24 months to find someone willing to monetize the incredible bubble of temporary, excess franchise value inherent in AOL's equity price. Left on its own, AOL would have become another Yahoo.

But Steve Case managed a masterful sleight-of-hand trick. By convincing TimeWarner's Gerald Levin that AOL's content and distribution, married with TW's content, would make for the first great internet content-plus-access giant, he successfully off-loaded his shareholders' price risk to TW's hapless owners.

Case exited the combined company rather quickly. It was fairly easy, as a former AOL shareholder, to immediately sell TW shares at a decent price.

To see how big a con game Case managed to pull on Levin and his board, note how tepid the market's response has been to Comcast's purchase of NBC from GE. Yesterday's Wall Street Journal editorial by Holman Jenkins castigates Comcast for being late and myopic in understanding what is at stake. How fast the movement of viewing platforms has moved, so that the real game is already beyond television, and onto laptop and cell phone screens.

Steve Case managed to convince Gerald Levin ten years earlier that there was value in combining distribution and content. A concept about which I've written in prior posts over the past years, as have others in other media. It's never worked. It's always been a flawed strategy.

In the case of AOL-TW, as I mentioned to my colleague, when he asked, neither Case nor Levin addressed the price issue on CNBC Monday morning. Neither did any of the co-anchors. Amazingly, everyone simply bought the story of implementation failure, electing to ignore the obvious overpayment by TW for fleeting value temporarily resident in AOL's equity price at the time of the merger.

Case solemnly spoke to issues of implementation with a straight face!

What an actor! What a magician! He duped Levin into overpaying for a dial-up based internet access firm about to be crushed by high-speed cable. He adroitly invited Levin on air to confess to his errors, leaving Case to avoid the spotlight.

The truth is, Case delivered for his shareholders, then moved on to new ventures. By inviting Levin to appear with him and take all the blame, as well as conveniently ignore his own culpability in even doing the merger, Case publicly shut the door on ever being viewed as a charlatan.

Credit Steve Case with continuing brilliance. He saw the end of AOL's dominance long before anyone else, and, unusual for a CEO, actually accepted reality and moved to get ahead of it. He found a dupe to pay full price in advance of the decline of value in AOL's business model. He rewarded his own shareholders, then smartly left the scene, moving on and away from the developing disaster at TW-AOL.

The best part of the story Monday morning, and probably forever, about the AOL-TW merger, will never emerge from Case's lips. He's much too smart and clever for that.

didn't go far enough. Or give Steve Case due credit.

Gerald Levin & Steve Case on CNBC This Morning: TimeWarner-AOL Merger Failure

CNBC had former AOL CEO Steve Case as guest host this morning for several hours. As his guest, Case invited his former co-CEO, TimeWarner's Gerald Levin, to appear and discuss the merger which is now generally regarded as the worst of that decade, or the past ten years, if it's not a formally-demarcated decade.

The exchanges among Case, Levin, and the CNBC co-anchors, as well as Levin's own soliloquy, were amazing. And not in a good way.

First, let me remark on Levin's performance.

If memory serves, Levin's son was murdered in a highway robbery-and-murder case sometime during the aftermath of the TimeWarner-AOL merger. Even back then, I believe Levin gave the event some weight in his decision to leave the company. It's fair to say that it had a profound effect on him.

That said, Levin's new persona is, to be blunt, stomach-churning. He now sports a goatee/beard and moustache, jacket and open-collared dress shirt, and a whole new, evidently therapist-supplied vocabulary of kindness and gentility.

Levin took total responsibility for the merger's failure, absolving Case, who sat only a few feet away, as well as the TimeWarner board.

This is ridiculous. As I said to colleagues at the hedge fund with which I worked at the time, the TimeWarner board should have engaged an investment bank, economist and valuation consultant to build a case that TW's shareholders would be harmed in the long term by being forced to buy a temporarily overvalued AOL with TW equity. It wouldn't have taken too much to construct a reasonable defense that would have allowed Levin and his board to contest the merger bid from Case's AOL.

In any event, Levin's statements merely add to the view that corporate boards are meaningless. Not to mention that he implied that he would have, or did, simply ignore whatever his board, as shareholder trustees, wanted, and forged ahead regardless.

Thus, I think Levin marked himself this morning as simply a poor, inept CEO.

However, Levin then took questions and pontificated on large mergers, TimeWarner-AOL's subsequent inept merger implementation, and various other managerial topics.

His comments were peppered with soft, touchy-feely phrases which really do suggest he's spent a lot of time and money on therapy. The phrases, which I can't recall exactly, truly sounded like a well-rehearsed mantra which emanated from his therapist's mouth.

Essentially, Levin alleged that the post-merger challenges were all about people, expectations, fears, etc., and that he and Case were required to satisfy "Wall Street" expectations. Thus, Wall Street was the villain, and poor Levin and Case were just babes in the woods as they tried to merge and then manage the two companies.

Case chimed in similarly, which isn't surprising. He has taken his winnings and moved on to another web-based business. It's easy for him to now declare that it was really always about people, not technology.

That's not what he said at the time of the merger.

Further, Levin now confesses that the performance that he and Case promised in the first merged year was, in reality, unrealistic.

Sounds like fraud and incredibly naive management, doesn't it? I mean, Levin didn't stop the deal because he couldn't commit to the performance he believed was required by shareholders or analysts. Neither did Case. Neither resigned or said they really wouldn't be up to the task.

No, they both took lavish compensation and then, much later, declare that it was never really possible to meet investors' expectations anyway.

Pardon me, but who exactly set those expectations in the first place? Wasn't it Case and Levin, to justify a merger that few thought was really worthwhile?

Let's be really frank here. In 1999, nobody wrote blogs, and I didn't write this one. But at the time, I verbally declared to all who would listen that the TimeWarner-AOL merger was simply a case of the latter cashing in on its temporary valuation surge, at the expense of the former. Nothing more, nothing less.

There was zero business reason for the merger. I immediately sold the shares I held by virtue of my AOL position when the merger closed.

To see Levin now denounce GE, Citigroup, and a host of other companies as lacking in focus and managerial sensitivity, or whatever it was he babbled about, was almost embarrassing.

Equally embarrassing was that nobody on CNBC even pretended to question, challenge or otherwise call Levin, and, for that matter, Case to account for the mess they created.

It was shameful. Instead of grilling the two in front of business viewers, they just lobbed softball comments and occasional helpful, nearly adulatory questions.

From what I saw, Levin is just one of at least two lawyers who inherited large, unwieldy companies and mismanaged them into disaster. The other, of course, is Citi's Chuck Prince.

To suggest that Levin has anything worthwhile to tell anyone else, or any other CEO, except,

'Don't be a lawyer and try to pretend to be CEO at a large, complex, already-undperforming company,'

is just plain silly.

Levin isn't some accomplished graybeard former CEO. He is a failed wannabe-CEO. Steve Case induced Levin to snooker his own board and rob his own shareholders' wealth to give it to investors in AOL.

CNBC does a great disservice to business and investors everywhere by giving Levin and Case this platform, sans critical questioning. Levin and Case then proceeded to compound the mistake by behaving like they were somehow victims, themselves.

All in all, a disgusting, nauseating performance this morning on CNBC.

The Scramble to Cannibalize AOL

The recent interest by Google, Yahoo and Microsoft in Time Warner’s AOL unit seems to be confusing quite a few analysts and other observers. I do not agree that AOL is suddenly “valuable” again, as it was when it merged with Time Warner in the ‘90s.

Rather, these other companies see a possible opportunity to scavenge some of AOL’s parts on the way to changing the terms of competition in the larger arena in which AOL once played a dominant role. None of the three suitors would likely care about the dial-up access business, nor, for its own sake, the content portion of AOL. What they all want is AOL’s customer base to which to market their own collection of internet-oriented services.

Their very interests in the remains of AOL’s customer base signal that their strategies have devalued this older business model. AOL is a faded brand in a growth industry. Further, the industry has changed so much that companies with concepts still in their infancy in AOL’s heyday are now dominating it.

Google creates its value in other ways, and is perhaps looking to deny a piece of AOL to a competitor. The same is true of Yahoo. The combination of Yahoo’s and MSN’s messaging services further devalues AOL AIM system, because all of these are free.

The current competitive situation in this arena finds AOL still in possession of a customer base which sizable and somewhat unique. Before that is no longer true, these newer entrants, and one old one, Microsoft, are hoping to capitalize on the value of that base. The incidental businesses which originally attracted the customer base are probably not all that valuable to anyone now. If they were, AOL wouldn’t be in the trouble it’s in today.

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, et.al.). 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.