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. Really, Warner Bros. has an extended historical past of messy company marriages and divorces. It may very well be a cautionary story concerning the risks of mergers and acquisitions. You possibly can even name it the Warner Bros. Curse.

Over the past decade alone, the Warner Bros. Curse has proven itself not less than twice. In 2018, after a two-year regulatory battle, AT&T acquired what was then known 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 large 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 identify (Frankenstein is one other Warner Bros. property).

Since then, the corporate has made a collection of weird selections, 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 that they had 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 seemed good earlier than releasing it. The outcome: 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 all their actors pretended to throw up. This entire chapter of Warner Bros. historical past has confirmed to be, um, Looney Tunes.

Economists who research mergers and acquisitions have lengthy puzzled over why so many company marriages go unsuitable. “Research after research places the failure fee of mergers and acquisitions someplace between 70% and 90%,” wrote the legendary Harvard Enterprise Faculty scholar Clayton Christensen and colleagues in Harvard Enterprise Assessment again in 2011. The story of Warner Bros. is a fairly attention-grabbing case research to get an understanding of why so many mergers and acquisitions fail.

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

As we speak within the Planet Cash publication, we take a look at that disastrous merger. And we ponder some explanation 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 cellphone 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 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 hundreds of thousands of regular Individuals. In 1998, the corporate’s recognition even impressed a zeitgeisty rom-com, You’ve got Bought Mail (which, you guessed it, was produced and distributed by Warner Bros.) Within the midst of dotcom mania within the late Nineties, AOL’s share worth was rocketing by means of 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 needed to leverage his firm’s inflated share worth, purchase one thing large and tangible, diversify his firm’s enterprise mannequin, and safe a extra resilient company future. Time Warner had severe enchantment. For one, AOL was more and more entering 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 useful 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 file firm, HBO, CNN, TBS, and Sports activities Illustrated. However his firm’s inventory worth was underperforming in the course of 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 known as one other “reworking transaction” — a merger or acquisition — to revolutionize his firm and safe his legacy.

When Case known as Levin, he did not beat across the bush. “Jerry? I have been considering: we must always put our two firms collectively. What do you suppose? Any curiosity?” he stated, in accordance with a wonderful 2004 e book 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 needed 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 option to a extra soft 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 out to be Time Warner’s CEO, Levin had an extended profession within the decrease rungs of its govt crew. In late Eighties and early Nineties, when Time Inc. sought to merge with Warner Bros. (then often known as Warner Communications) and type what would turn out to be Time Warner, the transaction encountered severe difficulties (the Warner Bros. Curse!). An organization often known as Gulf & Western — which might quickly be renamed Paramount Communications, and right now is called Paramount Skydance — tried to stage a hostile takeover of Time Inc. (Sound acquainted?) That hostile takeover in the end failed, however it value Time numerous 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 needed this assembly to be a secret. In order that they rented a set at a lodge 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 means of deep philosophical conversations about enterprise and life, they determined they had been simpatico. That evening, they determined they might marry their two firms, forming the world’s largest media and leisure firm.

There have been nonetheless thorny particulars to work out. Like, what proportion of shares on this new firm would either side get? AOL had a inventory market capitalization that was practically double Time Warner’s, and its inventory worth was rising a lot sooner. However when it got here to the meat and potatoes of precise income, Time Warner truly made far more cash. And it had useful belongings, together with a sprawling array of media properties and bodily cable infrastructure. Levin needed a 50-50 break up in a brand new merged firm. Case rejected 50-50. After months of negotiations, Levin in the end 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 seemed like an influence couple that will dominate the twenty first century. Many analysts thought it was sensible. The brand new firm promised astounding charges of revenue progress.

A star-crossed marriage

However virtually instantly, the wedding between AOL and Time Warner turned rocky. Levin had negotiated this deal whereas conserving a lot of Time Warner at nighttime. 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 workers had been offended concerning the merger.

And, as the businesses started to merge, AOL and Time Warner had large tradition clashes. Time Warner was old-fashioned. Its board conferences had 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 needed them to be below extra centralized management, and pursue cross-platform promoting offers. AOL was obsessive about beating expectations, stoking investor pleasure, and juicing their inventory worth. Time Warner executives had been much less obsessive about metrics and chasing short-term inventory features. Both sides thought the opposite facet knew nothing about their facet of the enterprise. There was numerous animosity as the 2 groups grew to become one.

Possibly it could have all labored out in a rosier market. Nevertheless, 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 12 months 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 fee of progress 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 progress 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 bought a lot worse after the spring of 2001, when America formally entered a recession. Then got here 9/11, and the economic system bought 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 workers and started making drastic cuts. They bought tremendous petty about worker bills, like eliminating free soda and forcing workers to purchase from merchandising machines. Worst of all, AOL executives resorted to cooking their books, attempting to make it appear to be their promoting income was strong when actually it wasn’t.

The dangerous information for AOL Time Warner saved 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 towards Levin.

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

With Levin exiting, a civil conflict broke out inside the firm. The 2 sides hated one another. Levin’s alternative as CEO, Richard Parsons, would later inform The New York Instances, “It was past definitely my talents to determine the right way to mix the previous media and the brand new media tradition. They had been like totally different species, and in reality, they had been species that had been inherently at conflict.”

In the summertime of 2002, The Washington Submit bought 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 Trade Fee, and AOL Time Warner’s inventory worth went right into a free fall.

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

What’s right now known 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, principally, don’t be concerned, we can’t fall sufferer to the Warner Bros. Curse like so many have earlier than us.

“A variety 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 latest name with Wall Avenue analysts, in accordance with Deadline. “They did not actually perceive what they had been shopping for. We perceive these belongings that we’re shopping for, the issues which can be essential in Warner Bros. are key companies that we function in, and we perceive. A variety of occasions, 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 making an attempt a hostile takeover. The 2 are actually concerned in a battle that would show to be an intense bidding conflict, growing the possibilities that Warner Bros. may very well be concerned in one other ill-fated merger.

What causes so many mergers and acquisitions to fail? One large cause is that the consumers are inclined to overpay for what they’re buying. There are numerous potential causes for that. One is expounded to one thing we wrote about in a latest publication and coated in The Indicator. Behavioral economists have lengthy noticed that winners in auctions — or actually any market the place individuals competitively bid towards 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 successful 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 dangerous 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 choose and select particular person shares. The fundamental thought is that inventory costs already mirror accessible info, and it is exhausting to beat the market. Possibly that extends even to many CEOs and professional govt groups shopping for or promoting firms.

If you happen to’re an organization looking for to purchase one other firm, “[y]ou are virtually at all times going to pay extra – usually considerably extra – than the agency is at the moment value,” writes Melissa Schilling, a scholar on the NYU Stern Faculty of Enterprise. “If you happen to did not, the goal’s present homeowners would not promote. Their outdoors possibility is at all times to carry or promote to a different bidder at the next worth. Meaning your acquisition is barely going to repay if 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 homeowners 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 out to be one. In the end, they might overvalue what they’re shopping for or merging to create.

Or possibly firm leaders typically do foresee the true worth, however it’s for themselves, and never essentially for his or her workers or shareholders. In a 2022 e book, 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 widespread cause why, regardless of a excessive failure fee, so many company leaders are so gung-ho to do mergers and acquisitions. Mainly, firm leaders and advisors can usually make big sums of cash from M&A transactions — type of like Warner Bros. Discovery CEO David Zaslav has within the transactions he is been concerned with — even when these transactions in the end fail to spice up their firm’s income and serve their shareholders and workers.

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

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

There are numerous different potential explanation why mergers and acquisitions can go unsuitable. However the story of AOL and Time Warner’s disastrous merger actually highlights how the precise work of constructing two firms into one could be actually messy. Tradition clashes, private animosities, and the complications of implementing new processes, constructions, and methods could be demoralizing to workers and damage a newly merged firm’s efficiency, detracting from the synergies that the businesses had been initially hoping for.

We sit up for seeing how this new sequel to the decades-old franchise of Warner Bros. mergers and acquisitions seems. Positive, it may show to be like The Darkish Knight, a industrial and important success. Nevertheless, there’s a large danger it may very well be extra like Joker: Folie à Deux, one other Warner Bros. flop.