Managing Change: Strategies for Mergers and Acquisition AOL and TIME WARNER - Case Study Example

MANAGING CHANGE Table of Contents Introduction 3 The Backdrop 3 America Online (AOL) 3 Time Warner 4 AOL Time Warner 4 Implications of the merger 5 Managing the Change 6 Change Management Tools 7 Change Agents 8 Principles of Strategic Change 9 Conclusion 11 References 12 Bibliography 13 14 14 Introduction According to the recent discussed theories on management, ‘the only thing constant in this world is change’. So, we can understand the relevance and importance of the word ‘change’ or rather the applicability of the changing process. The most important aspect of changing process is the management of changes. There is a little doubt regarding the issue that changes in a business firm or in a corporate house are felt most in case of mergers and acquisitions. In the case of mergers, two similar sized companies decide to come together for mutual benefits whereas in case of acquisition a relatively larger company acquires a smaller company. In both the cases of mergers and acquisitions, two separate entities decide to come together; a change is certain to happen in the new amalgamated set-up. The change is expected in the company policies, management hierarchy, and customer relations among other major things. And if the merger is that of the largest merger till date, we can understand the proximity of the change. Merger of Time Warner with America Online proves the fact. The Backdrop America Online (AOL) Beginning its journey with the name of Quantum Computer Services, America Online (popularly known as AOL) has been one of the most successful brands in the world of internet. Proving the fears of many experts wrong, AOL was successful even after the free internet service providers entered the market. AOL also successfully survived the dotcom bust when many of its competitors had to shut their business. Time Warner For a long time Time Warner has been a part of various mergers and acquisitions. The company, Time Warner, was formed in 1990 when Time, Inc and Warner Communication decided to merge together. It has a wide array of business initiatives ranging from producing films, publishing books, broadcasting, etc. Some of its leading brands are Time, CNN, Warner Brothers. AOL Time Warner It was early January of the year 2000 when the biggest corporate merger was announced as an all stock transaction. But there were certain issues to be settled before the deal saw day’s light. After about a year, on 11th January 2001, with the approval of FCC, the deal was signed of making AOL Time Warner, the largest media and entertainment company in the world. Though, both the companies claimed it was ‘a merger of equals’, but actually AOL shareholders owned 55% stake of the new company and the remaining 45% stake of AOL Time Warner belonged to the shareholders of Time Warner (McCullagh D., December 2000). The new company initially traded at the New York Stoke Exchange with the symbol of AOL. But with the passage of time as AOL started reporting huge losses, to boost up the emotions of the investors of AOL Time Warner, the company changed its symbol to TWX which was more respected and decided to be known as Time Warner. With the merger (or acquisition, as some prefer to call the deal), AOL Time Warner turned out to be a media conglomerate with a vast reach among the customers of broadband, cable modem, digital cable television, and internet based services like online music, online games online music among others. The company expected to have more than 100 million paying subscribers from immediate effect including AOLs dial-up users and cable and magazine subscribers of Time Warner. Implications of the merger Comparing the two corporate houses we find, Time Warner and AOL had diversified organisational frameworks. While Time Warner has been a more conservative in approach, AOL being a player of IT industry and relative new company had a modern outlook. The major factors in which change was to be made were as follows: The structure of the newly merged company saw a havoc change. It was found that most of the regular and repeating activities were outsourced. Also, the company decided to do away with the continuous presence of human resource executives. The HR executives working with the two corporate houses at the foreign branches were encouraged to socialise and draft out a global plan so that issues (regarding the merger) of the foreign employees get settled without much hassle. With the objective of acquiring competitive advantage, AOL Time Warner came up with a concept of talent pool. It identified a few key employees (around 300) and made few major changes. The recruitment strategy has also seen a major shift in the new company. The new management decided to hire seasoned recruiters who had considerable contacts with the senior professionals in the industry. For the junior positions, a new way was introduced to spot talents. If any aspirant applied for a particular position and the recruiters considered him befiting for another position, he was offered the second position. If any further confusion persists among the employees, the newly formed company came up with tutorials through intranet which explained the reasons of the merger. It also explained the businesses in which the company operates and most importantly, it tried to clarify the way through which the employees could be benefitted by the merger. Managing the Change Although the much hyped merger of AOL and Time Warner was promoted by both the companies as ‘a merger of equals’ but actually it was not the case. Analysing the financial figures it was found that during the period, Time Warner had revenue of $27 billion where as AOL had revenue of mere $5 billion. Also, Time Warner had 70,000 employees on their roles compared to that of 15,000 employees of AOL. Still the stock market valued Time Warner at only $90 billion while valuing AOL at hopping $175 billion. All these developments left many experts dazzled. For the investors of AOL, also it was a confused stage as they had expected to own 68% of the new company on the basis of market capitalisation (AOL Time Warner : What Happens When Fools Rush In to a Merger, October 6th 2004). The scheme of things surely suggests that AOL, being a small company, has acquired a much bigger name Time Warner. This could have led to internal chaos. From the analysis of the next few happenings, we can say, it was managed by bringing in most of the senior members of Time Warner in to the crucial position of the newly formed company as Steve Case of AOL became the Chairman and Time Warner’s Gerald Levin was made the CEO. For the successful operation of any company, the compliance of the employees to the organisational culture is one of the most crucial considerations. And when there is a merger (or acquisition), the organizational culture is bound to change. This was clearly evident in the case of AOL Time Warner. Time Warner being a much bigger company, had a decentralised culture in place. As it was a company which caters to the information requirements of the public, AOL was more responsive to the market. It was evident from the operation of AOL that it followed ‘Top-Down Approach’ (breaking a system to many sub-systems to understand the process). With so much difference, it was very evident that special steps with due importance and care had to be taken to merge two companies of widely varying speeds. Change Management Tools It has been found that there have been a record number of mergers in the last decade. Most of the mergers take place to reap the benefit of long term synergies. Today, it is an established fact that the prime reason for the failure of the merged company is because of human resource. Most of the times, the human capital does not gel into the new set up, so to address this challenge, apart from encouraging the employees to socialise with each other, more training measures must be initiated. Most of the times, a tendency has been observed that the employee adheres to the culture of the former company and is reluctant to the new way of things. This attitude (at least, in case of senior members) should be dealt with human sentiments. In the case of merger in between Time Warner and AOL, the integration of the wide differences in their respective culture was also a consideration. AOL had a brash young modern culture whereas Time Warner had a culture of legacy in journalism and print media to maintain. So, it was utmost important to devise an organisational culture for the new set-up which will be progressive as well as conservative. The new management therefore came up with the strategy of declaring the merger as a fulfilling story in the corporate history. Apart from the human capital, the process of both the companies should also get integrated. It might so happen that a particular initiative of the merging company can attain higher results through a process of the other merging company. In the particular case of AOL Time Warner, it was experienced that the subscription of the magazine published by Time Warner was boosted by 100,000 copies. It was assessed that the reason for such an increase in sale has been because of the distribution channel of America Online (AOL) through plug-ins and other mediums. Proper operational measures should also be incorporated in the new set-up. As the operational techniques of both the merging companies undergoes rapid change, it is very important to have a detailed framework of operational measures to be in place to obtain efficiency. If not, it may lead to utter confusion and wastage of resources. The most important tool for identifying the success of change management can be understood through financial results. The main objective of any merger is to reap the benefits of the synergies to be obtained through the unification of the two companies. But it has been observed that synergies projected for mergers and acquisition deals are not achieved in 70 percent of the cases and productivity may be reduced by 50 percent (Fink L. S., No Date). Change Agents The prime agents of change in the historic merger of Time Warner and AOL has been the technology as the management of both the companies believed that in future, technology will drive all global changes and it is only technology which can penetrate into all levels of society. The vast opportunities of cross promotions that were opened to both the organisations were also crucial agents. After the merger, AOL Time Warner could directly advertise and sale through internet. AOL could provide faster service to its internet subscribers as they now had the access of the cable lines laid by Time Warner. Also, both the companies mutually benefitted from each other’s extensive customer base. The efforts taken to integrate the cultures and compensation policies also acted as changing agents. Time Warner had to do away with its old way of profit-sharing in favour of stock options. Also the new management proposed a number of new steps to act as the changing agent. Steve Case of AOL and Gerry Levin of Time Warner, both believed that there are enormous opportunities which the merger can bring forward and acted as the human face of the agents of change. Principles of Strategic Change We have seen earlier that most of the mergers fail to provide the expected results. This mostly happens as the merging companies do not follow the principles of strategic change. Few of the principles are enumerated below: Well defined premises – The merging companies should be very clear from the outset about the motive of the merger. The objectives should be transparent and well-defined. The premises should also provide clear indication of how the decisions are to be made and conflicts (if, and when arises) are to be resolved. Disclosure of details – The details of the new company should be disclosed. At times it happens to be kept hidden which may be fatal for the company. Informed Stakeholders – The stakeholders (e.g. suppliers, bankers, etc) of the company must be kept well-informed for long term benefits along with the shareholders. Aggressive approach – Sometimes, it happens that the amalgamated set-up starts on a very conservative approach. But as there are considerable hypes involved with any merger, the performance gets a lack luster look. So, the company should set up an aggressive target from the very outset. Cultural integration – The employees of the two merging companies should be encouraged to integrate and adapt to the new culture. The organisational culture should contribute to the business goal. Informed employees – The employees of the merged company should well informed by the management. If the management decides not to inform them, it may lead to grapevine or rumours which may in turn defeat the organisational objectives. Proper authority-accountability relationship – The merged company should have proper authority- accountability relationship so that there is no confusions if any agreed plans are to be changed. There should be clear chain of command (Adolph G., Elrod K., and Neely J., March 27th 2006). Conclusion The mega media marriage acquired unprecedented control over the information and the entertainment industry. Still it was evident from the performance of AOL Time Warner that it did not reap the expected synergies. Though both the companies denied the fact and sounded very optimistic but the fact was something different. In 2003, the valuation of AOL Time Warner was mere $90 billion, where as soon after the merger the combined valuation was at hopping $250 billion. The reason might be the unsuccessful efforts to integrate two widely different cultures. AOL followed a fast-track next generation culture where as Time Warner was more conservative in its outlook. The other reason might be the extent of job cuts, without proper clarification, with in a few days after the merger which might have contributed towards the insecurity of the employees. The lack-luster performance of the company was evident as after a year of the merger, the stock prices traded at 52-week low. Today, AOL is just a division of Time Warner. Also, there are certain speculations in the market that Time Warner might sale off America Online in future. 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