The AOL Time Warner Disaster | Cold Case | 3

0:00Please be advised that the following episode contains depictions of violence and is not suitable for everyone.

0:15January 2000, a few hours before AOL and Time Warner announced their plan to merge. At AOL headquarters in Dulles, Virginia, the boardroom's abuzz. Senior Time Warner and AOL executives work shoulder to shoulder, racing to ready the necessary paperwork to enact the merger. Among them is David Colburn. He's head of business affairs at AOL. His department will spend a good chunk of the next 12 months trying to keep the merger on track by finding ways to fluff up AOL's quarterly results. But right now, Colburn's focus is on the thick contract in front of him. He wades through page after page of dense legal ease.

0:57One of the clauses references another contract. He looks around his desk for the document. It's not there. He turns to face the Time Warner executive next to him and points at the name of the missing contract. I need this file. Now. Go get it. The Time Warner man frowns, but retrieves the file all the same. But when Colburn tries to take it, the executive doesn't let go. David, I did not appreciate your tone toward me just now. You're acting like you're taking us over. That's because we are. Give me that. Colburn yanks the file out of the shock Time Warner executive's hand and gets back to work.

1:39When Time Warner's top executives were told about the merger, CEO Jerry Levin stressed that this is a merger of equals. But AOL's executives don't see it that way. AOL shareholders will own the majority of the new company's stock. It doesn't matter that AOL will become just one division in a far larger business. Nor does it matter that Levin will become CEO of the new company. This is an AOL takeover, and they expect to call the shots. As the Time Warner executive sits back down, the AOL executive sitting opposite him smirks. You people are so... The mask has slipped. The reality of this merger is now clear.

2:27Time Warners let the wolves through the door, but it's already too late to stop it. And when the merger finally happens in January 2001, the relationship between the two sides of this deal is only going to get uglier.

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4:53From Wondery, I'm David Brown, and this is Business Wars.

5:22On the last episode, AOL and Time Warner agreed to merge in an all-stock deal. But while they waited for regulator approval, tech stocks went into a meltdown. Now investors worry that Time Warner's made a huge mistake by selling to AOL. This is Episode 3, Cold Case.

5:51January 11, 2001, Midtown Manhattan. It's 3 a.m. and outside 75 Rockefeller Plaza, a work crew is moving in. At the entrance, they climb up the step ladders with their tools in hand and start removing the Time Warner sign above the door. In its place, they attach three-foot-high brass letters that spell out the name of this skyscraper's new resident, AOL Time Warner. The biggest merger in U.S. history has finally happened. After almost a year of waiting, federal regulators have signed off on the deal. The result is AOL Time Warner, a global company with nearly 85 ,000 employees and sales of around$30 billion a year.

6:40Later that morning, AOL Time Warner shares start being traded on the New York Stock Exchange. The buying and selling is brisk. That day, AOL Time Warner shares change hands more than 33 million times. But the share price barely moves. It ends the day at$46.47, down 76 cents. But analysts aren't worried. they believe AOL Time Warner is set for greatness in the coming era of online entertainment. But now that the company exists, it has to deliver. CEO Jerry Levin and Chairman Steve Case sold the merger with promises of game-changing synergies. Synergies that would boost cash flow and cause revenues to soar at least 12 % every year.

7:27But within the company, these heady targets inspire only dread. So, do you see this coming? It's a classic. Over-promising under pressure. Case and Levin made wild claims to sell this merger. Now every team in the company has to live up to the hype. It's tempting to promise aggressive growth, but there's a flip side. You see, optimism has a shelf life. It doesn't help that the fallout of the dot-com crash is now spreading to the entire economy. The nation is tipping into recession. The advertising market is softening, damaging sales at AOL and the company's TV and magazine divisions. And the piracy website Napster is eroding sales of music.

8:17AOL Time Warner executives fear Levin and Case's promises are now unachievable. Some head to Levin's office on the 29th floor and urge him to downgrade the promises. But he refuses. All he hears are divisional chiefs complaining that the targets he's given them are too hard. And that's what divisional chiefs always say. Besides, he wants to reshape the company's culture. He wants the parts of the business that came from Time Warner to be more like AOL. He wants less complacency and more hunger for success. But in the floors below, there's friction between AOL and the rest of the business.

9:05It's a few days since the merger, and at AOL Time Warner headquarters, AOL ad executive Meyer Burlow rushes out of the elevator and down the corridor. Today, he's expected to close a$100 million deal with the fast food chain Burger King. The deal would see Burger King promoted on AOL and Time Warner properties. It's the kind of deal the merger is supposed to enable. But now, the deal's about to unravel. Burlow marches into the office of Bob Pittman. Pittman used to be the president of AOL. Now he's one of AOL Time Warner's two chief operating officers, and responsible for delivering the synergies that will justify the merger.

9:47Bob, you gotta do something. Those Time Warner people you put me with are out of their minds. Will you calm down? What happened? They're talking about vetoing my Burger King deal. It's a$100 million payday they're blocking. Well, they must have a reason. Well, they say we can get more money out of Burger King. How? They think if each division goes and does its own deal with Burger King, we'd make more money overall. You've got to overrule them. Pittman shares Burlow's frustration. He knows many of the executives from Time Warner don't want to work with AOL. They're used to focusing on their own part of the business.

10:23The AOL team thinks that's old-school thinking that doesn't apply in the Internet age. But Pittman knows that overruling people will just create bad blood when the goal is to get everyone working together. Meyer, you need to go back downstairs and get along with them. We can be successful, but we can't be pushy. We can't let our aggressive behavior hurt this company, so come on, just suck it up. This is more than just office drama. This is a red flag. In a merger, culture eats corporate strategy for breakfast. When you try to jam two radically different teams together, one brash and digital, the other legacy and corporate, that's not peanut butter and jelly.

11:07That's a recipe for turf wars. Smart entrepreneurs know to treat culture as a due diligence item, not an afterthought. The Burger King clash is no isolated incident. Across the company, AOLers are butting heads with executives who originated in Time Warner. They argue about Warner Music artist Madonna seeking tour sponsorship from AOL rival Microsoft. They fight about whether AOL should pay to put Fortune magazine content online. Efforts to foster synergy get bogged down in endless cross-departmental meetings that lead nowhere. And the synergies that do happen are underwhelming. Like AOL CDs getting distributed with Time, Inc.

11:55magazines, or AOL users encountering pop-up ads for Time Warner Cable. You know, the truth is, business leaders love to talk big about synergies when selling mergers. The idea that 2 plus 2 equals 5, not 4, is very alluring. But synergies, they're unicorns. Much discussed, rarely seen. Sure, maybe I'm being unfair. Synergies do exist. But making synergies happen is hard. It often comes down to personal relationships between people in different corners of the business. And even then, you gotta ask, is that synergy worth the squeeze? Here's a stat for you. It's from the management consultancy Bain & Company.

12:40They analyzed the results of more than 20 ,000 companies that did mergers. And what did they find? 70 % of those companies overestimated the value of the synergies their merger would deliver.

12:55In the spring of 2001, the U.S. enters recession. With consumer spending down, companies curb advertising budgets hitting sales at AOL. As the second quarter nears its end, AOL realizes it's going to miss its sales targets. So once more, its business affairs team gets creative. AOL dealmakers scramble to California on the company Jet to meet online marketplace eBay in San Jose. AOL already handles ad sales for eBay, selling space on the website for a commission. Under the deal, advertisers pay AOL, which then passes most of the money onto eBay. Each year, around$40 million of eBay ad money passes through AOL's bank accounts, and none of it counts towards AOL's own revenues.

13:46But during their visit to California, the AOL team persuades eBay to accept a tweak to their deal, one that lets AOL count eBay's ad dollars as AOL revenues. It doesn't make much of a difference to eBay. It still gets paid in the long run. But now AOL gets to add eBay's ad money to its top line and hit its targets for another quarter, even though not a cent of that money will reach AOL's bottom line. You know, AOL's not so much cooking the books as singeing them. Treating booked sales like revenue isn't usual accounting practices. At best, it's unethical, because it makes investors think the company's doing better than it really is.

14:33For nine months, AOLs used ruses like this to look like a winner. But reality is going to be hard to outrun. In July 2001, as the company prepares to release its second quarter results, Finance Chief Michael Kelly urges Levin to lower the company's growth projections. With the ad market in bad shape, the 12-15 % growth Levin promised seems unachievable. But Levin still believes he's sure the ad market will rebound. He also thinks the targets are essential to making the merger work. If he lowers the targets, it'll ease the internal pressure to integrate and embolden opponents of the merger. Kelly warns that failing to meet expectations could cost the company the trust of investors.

15:21So, Levin agrees they will tell the market that the original goal of$40 billion in annual sales is now the top end of their projections. A few days later, the quarterly results are published. In the earnings call, Kelly tells analysts that the company hopes for sales of$40 billion this year. He also concedes that if the ad market doesn't improve, the company may not get there. Wall Street does not overlook that comment. That day, AOL Time Warner stock drops nearly 10 % to$44.65. That summer, the situation worsens. Two executives involved in inflating AOL sales figures are suspended while an internal investigation takes place.

16:11Meanwhile, a reporter from The Washington Post starts poking around after getting a tip-off that AOL's numbers aren't what they seem. Then, the 9-11 terrorist attacks dash any hope of an ad market rebound. But by then, Levin is no longer focused on the stock price. 9-11 hits the 62-year-old CEO hard. He was in Sweden at the time, and he didn't know anyone who died or got hurt. But the massacre dredges up the suppressed pain of his own son's murder in 1997. Levin's son, Jonathan, was a high school teacher. But when a former student learned who his father was, he and an accomplice kidnapped him.

16:56They tortured him for his bank card pen, withdrew$800 from an ATM, and then shot him in the back of the head. 9-11 causes that pain to re-errupt within Levin. He returns to New York, a changed man. He no longer cares about the business he devoted his life to. Instead, he visits Ground Zero, walks the corridors checking on employees, and repeatedly bursts into tears. He tells Time, Inc. and CNN to spend whatever it takes to cover the war on terror. Then, he downgrades the growth targets. AOL Time Warner now projects revenues to grow 5 to 7 percent, less than half of what it originally promised.

17:44The company's stock sinks even lower, down to around$30. And this ruptures relations between Levin and company chairman Steve Case. The alliance between the two architects of the merger breaks down fast. Levin wants to forget financial targets and focus on healing. Case wants to get back to work. Levin tries to cancel a board meeting scheduled for just after the 9-11 attacks. Case refuses. As tensions rise, Case concludes that he made a mistake in stepping back to let Levin be CEO. So, he gets proactive. He barrages Levin with emails, demanding information, questioning decisions, seeking updates.

18:34Case's return-to-work attitude angers Levin. He now sees Case as a man without compassion, an android that talks of values but believes in nothing. Case looks at Levin and sees a man unraveling in real time and taking AOL Time Warner down with him. Their differences soon go public. Levin tells stockholders they shouldn't care about the missed financial goals because they're unimportant compared to the suffering caused by 9-11. Levin then appears in a series of magazine profiles that paint him as a visionary for his response to the terrorist attacks. That makes some inside AOL Time Warner wonder if his grief is real or a way to distract people from the company's troubles.

19:23Here's a delicate but important lesson. In high-stakes leadership, personal narrative often becomes part of corporate narrative, whether you mean it to or not. Over-identifying with your brand or being seen to leverage personal tragedy for sympathy, that can backfire fast. People want authenticity, but they also want boundaries, especially when billions are on the line. In response, Case becomes the public champion of the merger dream. He dismisses the missed targets as just a blip and promises strong growth next year and beyond. By November, AOL Time Warner executives are growing worried about Levin's behavior, as is board member Ted Turner.

20:10Since the merger, Turner's anger has been rising. The merger saw him lose his decision-making role in the business. Now, he's losing money, too. Most of Turner's wealth is in AOL Time Warner shares. Thanks to the falling stock price, he's lost billions of dollars. And that's made him mad as hell. In a board meeting, he pounds the conference table with his fist while yelling at Levin for his incompetence. The other directors are left speechless. But Levin just moves to the next item on the agenda, as if Turner's outburst never happened. The waning stock price also hurts employees. Many of their 401k retirement plans are tied to the share price.

20:57The lower it goes, the less comfortable their old age gets. And most of them blame that on AOL, the overvalued dot com that they feel tricked Time Warner into merging. By late 2001, the company's a tinderbox. and that's when Levin does the equivalent of striking a match. Since the summer, he's been hiding something from his colleagues and the company's board. He's talking to AT &T about buying its cable TV systems. It'll cost billions. And when he reveals his plan, the power struggle between Levin and Case will pass the point of no return.

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24:38It's late 2001, and in AOL Time Warner's boardroom, Chairman Steve Case is fuming. Why would we want another cable TV system? We already have Time Warner cable. This is just... Why? 14 million subscribers. CEO Jerry Levin cuts him off. Becoming the number one cable system, that's why. It'll cost tens of billions. Owning the fundamental architecture of high-speed Internet helps us to fulfill the potential of the merger. It's too much money. It'll only be less affordable in the future. That money would be better spent upgrading AOL. As the two spar, the rest of the board of directors splits down the middle.

25:17Half of the directors came from AOL. They are with Case. The other half came from Time Warner, and they're loyal to Levin. And that's new for Levin. Time Warner's board did whatever he wanted. But now, half the board is ready to block his latest acquisition plan. Case rounds on Levin again. I want to know why you've been talking with AT &T about this acquisition without consulting the board. It's an operational matter, not a strategic one. It is very much strategic, and my role is to oversee strategy. This is my jurisdiction. You're questioning whether we should become the biggest cable company.

25:54Well, the answer is obvious. Yes. The meeting ends in acrimony. Case decides he needs to take charge. So he issues Levin with an ultimatum. Resign or prepare to be fired. Levin doesn't resign. So Case follows through on his threat. But to remove Levin, he needs support from three quarters of the board members. He calls each one in turn, but he soon finds he won't get the votes he needs. Some directors don't rate Case as a replacement CEO. He still oversees AOL, and thanks to its falling ad revenues, it's now the company's problem child. Other directors worry about ganging up on Levin, given his fragile state of mind.

26:42But Case's failed attempt to organize a mutiny makes Levin realize his position is precarious and that he no longer wants to be CEO. On December 5, 2001, Levin announces his retirement. But before he leaves, he ensures that his successor isn't Case, but Time Warner executive Richard Parsons. Few people had paid attention to Parsons since the merger. He's a 6 '4 Brooklyn native whose knack for business took him from his black working-class childhood to upper echelons of business. After the merger, the 53-year-old's odds-defying assent seemed over. He was made co-chief operating officer, but he was overshadowed by the man he shared that title with, former AOL president Bob Pittman.