ON THE "BULL-" SYNERGY STRATEGY AT TIME WARNER

BEST OF INTENTIONS

The words in the title are not mine.  I try not to use that type of language in my printed discourse.

They're from Time Warner President and Chief Operating Officer Jeffrey Bewkes, the number two executive at the company. 

That's how this article from the Wall Street Journal quotes him in the context of  some difficult "cooperative" negotiations between corporate siblings Sports Illustrated and AOL:

"While Mr. Bewkes thinks cooperation should be encouraged, he's blunt in assessing the synergy message his predecessors preached to shareholders: "It's bull-."

Compare that to this statement from the company's 2005 annual report "Message to Shareholders" by Time Warner CEO Dick Parsons:

"Setting Time Warner apart is the fact that we have the world's leading media businesses under one roof.  This allows us to harness their collective resources to create new business models that set the standard for our industries."

Confused yet?

The article does a good job of historically pointing out various instances of senior Time Warner management who've privately felt that the "synergy" sell done for Wall Street's benefit did not work.  A case in point:

"Time Warner's new approach follows 15 years of conflict, dating back to the very founding of the company from the 1990 merger of Time Inc. with Warner Communications. Before the combination, Time Inc. was primarily a publishing company that also owned HBO and a cable company. Time executives saw their future in video and cable systems and wanted HBO and Warner Communications Inc. to cooperate closely. The plan largely failed.

"There wasn't a lot of synergy that took place," says Bob Daly, chairman of the Warner Bros. studio at the time."

And the article makes clear how management was focusing on a strategy similar to that proposed by shareholder activist Carl Icahn earlier this year, in his call to split up the company to improve shareholder value, while vigorously opposing that very plan.  (Carl Icahn ended his fight shortly thereafter),  As the Journal notes:

"Financier Carl Icahn argued for such an approach in his recent campaign to break up Time Warner into several pieces, only to be ridiculed by the company's management.

Yet even as it convinced shareholders to reject Mr. Icahn's blueprint, Time Warner has been quietly implementing something similar."

The reality is that media conglomerates like Time Warner cater to the whims of Wall Street. By Wall Street, I mean the confluence of public and private markets that dictate what is paid at any time for a given type of strategy.

For the last few years, the driving mantra in technology, media and telecommunications has been "Convergence". 

Wall Street rewarded the managements of the companies in these industries to pay lip service to this mantra at the very least.

Now the winds have shifted again, and the mantra of old seems to falling out of fashion.

Remember that this is a cylical event, going back and forth over many years across many industries on Wall Street.

The difference this time though is that there are very unique technology-driven forces utterly changing the businesses in these industries. 

And it's not just a simple matter of consolidating them when Wall Street fancies it, and spinning them off when they don't.

At least not if as a chief executive your intention is to create serious value for your shareholders by vertically integrating various assets across the company.

A case in point where vertical integration has worked so far is Apple, where CEO Steve Jobs ACTIVELY forced the various parts of Apple responsible for the iPod, iTunes, the online service, and the hardware and software businesses to work together to create meaningful services for mainstream consumers that are distinctive from the competition.

For a more detailed description of how this vertical integration has worked for Apple, see this recent piece by Walter Mossberg.

Not to mention stitching together alliances and partnerships across a range of industries to make it work in a "win-win" fashion for all the parties involved.

The chart above from Yahoo! Finance shows the result of that execution over the last five years.

In contrast, the Time Warner approach to synergy is described by the WSJ article as:

"Six times a year, Mr. Parsons summons his top deputies to the company's New York headquarters where they gather in a 10th-floor conference room overlooking Central Park to discuss their industries and settle differences. Recent meetings have focused on AOL's content strategy and the implications of "Startover," a new feature offered by Time Warner Cable that allows viewers to view in their entirety programs that have already started.

"Think of it as an extended family that gets together for Saturday dinner," says Turner Broadcasting chief Phil Kent."

Only, this is not about a family dinner, it's about returning value to shareholders.

So what's the new buzzword at Time Warner if not "synergies" and "convergence"?

Well, again, Jeff Bewkes of Time Warner seems to have a suggestion.  Again, from the WSJ article:

"Time Warner, currently the world's largest, has stopped requiring that its units cooperate -- instead of "synergies," managers speak of "adjacencies." It's also selling businesses that don't make enough money."

Hopefully that'll work for shareholders like yours truly, who've patiently held positions in the company for a long time.  Again, as the article highlights:

"After big declines in 2001 and 2002, Time Warner's shares have stagnated, and for much of the last three years they've hovered around the $17 mark."

Now that's a rate of return one could describe using Jeff Bewkes' epithet from the title of this post.

DISCLOSURE:  I hold shares in both Time Warner and Apple.

Comments

[rajAT]

Manual trackback

http://rajatgupta.wordpress.com/2006/06/04/aol-time-warner-is-bull/

[Employee of Time Warner]

Man, I'm as confused as you are and I work for Time Warner. Bewkes' quotes were clearly targeted at Parsons and perhaps it's justified. While Parsons has done quite a bit for TW since he took over, he has been less than clear about where the company needs to go for the future.

Beyond the words, the culture at TW is pretty sad. It's one that still promotes longevity and mediocrity versus true value add. There's a lot of resentment among divisions and with corporate.

I'm not holding my breadth but will leverage the company for my short term needs.