The Warner Bros. Curse

 

Netflix and Paramount are in One Big Battle After Another to buy the storied Hollywood studio Warner Bros. (Yes, One Battle After Another is a Warner Bros. movie).

This isn’t the first time Warner Bros. has been at the center of headline-grabbing merger or acquisition. Actually, Warner Bros. has a long history of messy corporate marriages and divorces. It could be a cautionary tale about the dangers of mergers and acquisitions. You could even call it the Warner Bros. Curse.

Over the last decade alone, the Warner Bros. Curse has shown itself at least twice. In 2018, after a two-year regulatory battle, AT&T acquired what was then called Time Warner for $85.4 billion, and renamed the company WarnerMedia. Many believed AT&T overpaid for the company, and the stock market never seemed to really love this deal. WarnerMedia struggled to find big profits in streaming, its movie business was devastated by the pandemic, and the companies’ cultures never really jibed with each other.

Netflix and Paramount are in One Big Battle After Another to buy the storied Hollywood studio Warner Bros. (Yes, One Battle After Another is a Warner Bros. movie).

This isn’t the first time Warner Bros. has been at the center of headline-grabbing merger or acquisition. Actually, Warner Bros. has a long history of messy corporate marriages and divorces. It could be a cautionary tale about the dangers of mergers and acquisitions. You could even call it the Warner Bros. Curse.

Over the last decade alone, the Warner Bros. Curse has shown itself at least twice. In 2018, after a two-year regulatory battle, AT&T acquired what was then called Time Warner for $85.4 billion, and renamed the company WarnerMedia. Many believed AT&T overpaid for the company, and the stock market never seemed to really love this deal. WarnerMedia struggled to find big profits in streaming, its movie business was devastated by the pandemic, and the companies’ cultures never really jibed with each other.

Economists who study mergers and acquisitions have long puzzled over why so many corporate marriages go wrong. “Study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%,” wrote the legendary Harvard Business School scholar Clayton Christensen and colleagues in Harvard Business Review back in 2011. The story of Warner Bros. is a pretty interesting case study to get an understanding of why so many mergers and acquisitions fail.

The most glaring example of the Warner Bros. Curse happened at the turn of the millennium. It’s widely considered to be one of the worst — if not the worst — mergers of all time. It was so bad that it’s still studied in business schools.

Today in the Planet Money newsletter, we look at that disastrous merger. And we ponder some reasons why so many mergers and acquisitions fail.

The merger of the century

In October 1999, Steve Case, the CEO of America Online (AOL), made a fateful phone call to Gerald Levin, the CEO of Time Warner.

At the time, Case was only 41 years old, but, over the previous 15 years, he had built one of the most exciting companies in America. Before AOL, the internet was largely a place for geeks and bureaucrats. Case’s company had made the internet accessible to tens of millions of normal Americans. In 1998, the company’s popularity even inspired a zeitgeisty rom-com, You’ve Got Mail (which, you guessed it, was produced and distributed by Warner Bros.) In the midst of dotcom mania in the late 1990s, AOL’s share price was rocketing through the stratosphere.

But Case was also worried. He was worried about mounting competition. He was worried that the stock market was in a speculative mania that wouldn’t last. And he was worried what would happen to his company if there was a crash. AOL didn’t really own much when it came to hard assets and the internet was changing fast. Case wanted to leverage his company’s inflated share price, buy something big and tangible, diversify his company’s business model, and secure a more resilient corporate future. Time Warner had serious appeal. For one, AOL was increasingly getting into the content game, and Time Warner offered exciting intellectual property to distribute. Even more, Case coveted Time Warner’s sprawling network of cable lines, which would prove valuable as consumers ditched dial-up modems and adopted high-speed internet.

Gerald Levin, on the other hand, was disgruntled with the direction of his company. Time Warner was by then a sprawling media conglomerate which, after a series of mergers and acquisitions, controlled media entities like Time magazine, Warner Bros. Pictures, a record company, HBO, CNN, TBS, and Sports Illustrated. But his company’s stock price was underperforming during the dotcom stock mania. He worried his company was failing to thrive at the dawn of the digital age. He was floundering while trying to usher in Time Warner’s digital future in house, and he yearned for what he called another “transforming transaction” — a merger or acquisition — to revolutionize his company and secure his legacy.

When Case called Levin, he didn’t beat around the bush. “Jerry? I’ve been thinking: we should put our two companies together. What do you think? Any interest?” he said, according to an excellent 2004 book by journalist Nina Munk, Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner.

Levin was interested, but he also played hard to get. “I don’t think so, Steve. But I’ll think about it,” he reportedly said.

By then, Case had grown insanely rich, had a second marriage he wanted to preserve, and he had grown tired of the intensive work of being the CEO of his company. He was now hobnobbing with bigwigs at places like White House state dinners and the World Economic Forum in Davos, and he was on his way to a more cushy life as an investor, thinkfluencer, and philanthropist. Case was prepared to step down as CEO and take a less time-intensive role as chairman of the board, and he knew exactly what to say to Levin to pique his interest: Levin would take the helm of this new corporate juggernaut.

But Levin was still wary. And he had reason to be. Before he had become Time Warner’s CEO, Levin had a long career in the lower rungs of its executive team. In late 1980s and early 1990s, when Time Inc. sought to merge with Warner Bros. (then known as Warner Communications) and form what would become Time Warner, the transaction encountered serious difficulties (the Warner Bros. Curse!). A company known as Gulf & Western — which would soon be renamed Paramount Communications, and today is known as Paramount Skydance — tried to stage a hostile takeover of Time Inc. (Sound familiar?) That hostile takeover ultimately failed, but it cost Time a lot of stress and money — and time — to avoid it, and Levin worried this was the beginning of another similar story.

After some back and forth over the next few weeks, Case and Levin decided to meet. They wanted this meeting to be a secret. So they rented a suite at a hotel in Manhattan, near Time Warner’s headquarters, and spent an evening together.

They ordered room service for dinner, drank fancy wine, ate chocolate mousse, and dazzled each other. Through deep philosophical conversations about business and life, they decided they were simpatico. That night, they decided they would marry their two corporations, forming the world’s largest media and entertainment company.

There were still thorny details to work out. Like, what percentage of shares in this new company would each side get? AOL had a stock market capitalization that was nearly double Time Warner’s, and its stock price was growing much faster. But when it came to the meat and potatoes of actual revenue, Time Warner actually made much more money. And it had valuable assets, including a sprawling array of media properties and physical cable infrastructure. Levin wanted a 50-50 split in a new merged company. Case rejected 50-50. After months of negotiations, Levin ultimately settled on Time Warner getting 45% of their new, merged entity.

On January 10, 2000, AOL announced it was acquiring Time Warner for $182 billion. It was one of the largest — if not the largest — corporate mergers in history. When they officially merged, the two companies would be worth $350 billion. It was a wedding between old and new media, creating what looked like a power couple that would dominate the 21st century. Many analysts thought it was brilliant. The new company promised astounding rates of profit growth.

A star-crossed marriage

But almost immediately, the marriage between AOL and Time Warner turned rocky. Levin had negotiated this deal while keeping much of Time Warner in the dark. He had treated his executives and his board of directors like a rubber stamp. Many felt the deal was rushed and sloppy. From the outset, many executives and employees were angry about the merger.