What Could Possibly Go Wrong?
High Net Worth Investing Lessons from the ‘Brilliant’ AOL-Time Warner Merger of 2000
On January 10th, 2000, AOL paid $182 billion to merge with Time Warner in one of the largest deals in history. High net worth investors – egged on by their financial advisors – rushed headlong into the merger and looked forward to robust growth and big returns.
The deal involved CNN, HBO, Time Magazine, internet company America Online, and many other valuable media assets including several owned by billionaire Ted Turner. It was hailed as a merger for the ages and a brilliant move that, according to Fortune, put other companies on the alert that they were officially at risk of being left behind.
What could possibly go wrong?
The deal quickly soured so badly that Ted Turner – by his own admission – lost 80% of his wealth, about $8 billion.
The fallout from what is now considered one of the worst mergers in the history of commerce – if not the worst – offers three valuable lessons for high net worth investors who want to secure their desired lifestyles through smart investment planning and wise financial advice.
Before we get to those three lessons, you need to grasp the epic nature of this deal and how hard, and how quickly, it crashed – and why.
Understanding the market’s epic blunder, will make you a better investor and better prepare you for the times ahead.
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A Wall-Street Dream Deal – What They Live for
The AOL-Time Warner merger is the sort of thing Wall Street falls for head over heels nearly every time one comes around. They love big deals like these, and this one was the best one yet. Its combined valuation reached $350 billion, an astronomical figure back in 2000, and its media properties and tech assets reached into virtually every corner of business and consumerism.
It took one of the biggest media conglomerates of the 90s, Time Warner, and combined it with a company that was like the Facebook, the Amazon, or the Google of that same era. Before any of these modern behemoths even existed, America Online was king of the newly born internet.
They offered a dial-up internet service and email, available as a monthly subscription, and also generated enormous profits through ads on their platform. They had 30 million subscribers. Does all this sound familiar? For the millennials reading this, it all sounds familiar except that ‘dial-up’ thing. Not sure what that is?
Guess what – that dial-up thing is one of the main reasons this deal fell off the cliff less than a year after it was signed. Keep reading to see why.
What’s the next “dial-up debacle” set to rock the market? To find out, go ahead and schedule a conversation with Co-founder Hutch Ashoo.
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Why the Merger Failed so Fast
Sometimes deals that seem foolproof fail because of a perfect storm of unforeseen oppositional forces.
That was not the case here. The failure of AOL-Time Warner was due to a lack of vision and good ol’ cooking the books. In 2002, just two years after the merger, the SEC and Justice Department started investigating AOL for “improperly inflating its advertising revenue,” according to the NY Times. They ended up paying huge fines.
False accounting aside, here’s what else went wrong:
- The dotcom bubble burst
- The economy nosedived into a deep recession
- Broadband internet quickly replaced dial-up
Dial-up internet was a terribly slow process. Anyone with vision should have recognized the very real likelihood that something better would come along to replace it one day. As it turned out, that day came very quickly. When broadband started taking over, dial-up internet became archaic technology faster than a pop-star’s one hit wonder fades from memory.
And when the dotcom bubble burst, AOL’s ad revenue plummeted. So not only were they inflating their ad revenue projections, now their real revenue was falling faster than anyone expected.
The money dried up quickly.
In 2002, just two years after it began, AOL-Time Warner lost $98.7 billion – which still holds the business record for amount of money lost in a single year.
As reporter Paul Bond says in the Jan 8, 2020 issue of The Hollywood Reporter, “It was incredible hubris and shortsightedness that destroyed the lives of employees who saw their retirement accounts wiped out.”
Lack of vision destroyed lives by wiping out retirement accounts – including many held by high net worth investors such as you.
If you’d like to avoid such a calamity befalling your portfolio, we encourage you to reach out to Co-founder Hutch Ashoo by scheduling a quick 15-minute chat.
3 Investing Lessons for High Net Worth Individuals
Let’s take a look at three lessons we can learn from this, so you can protect your retirement portfolio from being at risk of suffering so great a loss.
1. Don’t Concentrate Your Wealth in a Few Companies
Anyone who entrusted too much of their investment portfolios in AOL-Time Warner lost massive amounts of wealth in a very short time. Ted Turner lost 80% of his. 80%! It’s almost incomprehensible.
And in defiance of the popular advice that says if you just leave your money in the market, you’ll eventually make it back – nothing could be further from the truth if you are too concentrated in a handful of companies or sectors. AOL-Time Warner’s value never came back, and it never will.
For those who lost, they lost forever. Here’s the aftermath:
In 2009, Time Warner finally sent AOL packing, and spun them off as an independent company. Six years later, Verizon bought it.
For $4.4 billion.
And in 2018, AT&T bought Time Warner for $85 billion.
Are you getting the significance of these sales numbers?
A company that was bought for $182 billion and merged to form a new company worth $350 billion, was sold in two pieces, 20 years later, for under $90 billion.
After 20 years, it is now worth about 25% of its pre-inflation valuation at the time of the merger. In fact, the total of these two sales figures is less than the one-year record-setting loss of $98.7 billion way back in 2002!
Ted Turner never got his money back from this deal. And neither did anyone else who overly concentrated their wealth in AOL-Time Warner stock, or who worked there and was trusting in stock options to fund their retirements.
For you as a high net worth investor, if you have invested high percentages of your wealth in a handful of companies, even big ones like Facebook and Google, your money is not safe
History says otherwise. Few companies at the top stay there for very long. Microsoft has famously been at the top, then lost tons of money, and is only now finally clawing its way back to its former heights.
And if your financial advisor has recommended concentrated strategies like these – including hedge funds and private equity deals – you need a new financial advisor, because you may be putting large amounts of your wealth at great risk.
It simply isn’t worth it.
If Ted Turner can lose 80% of his wealth – $8 billion – how much might you lose to an overly-concentrated investment that goes sour?
AOL founder Steve Case may have said it best: “Vision without execution is a hallucination.” And if you’re financial advisor doesn’t have the vision or foresight to avoid “dial-up disasters” like AOL Time Warner, you need a new financial advisor.
A second opinion about your asset allocation and portfolio, could prove invaluable. To schedule a 15-minute chat with Co-founder Hutch Ashoo, click here. Your conversation could make all the difference to the growth and protection of your wealth.
2. Don’t Trust Self-Proclaimed ‘Experts’ and ‘Smart People’ for Investment Advice
Why can you trust Pillar Wealth Management? One simple reason is because we will never tell you to go invest in one company, or a small handful of them. No one has a crystal ball, and no one knows which companies will rise and fall. Including us.
A truly smart investor – and their financial advisor – will know that asset allocation and diversification provide the foundation for a more secure investment plan. The smart investor will plan in advance for a recession they know will come eventually. They will not panic in shock and react recklessly when it suddenly hits.
Media pedigree, business success, and educational accomplishments don’t necessarily indicate expertise when it comes to investing. No one is immune to having their emotions interfere with decisions related to money. It requires extraordinary discipline to keep emotions separate from your investment planning.
3. Be Prepared for Recessions and Market Volatility
The Hollywood Reporter’s Bond went on to say, “The smartest people on the planet didn’t recognize a stock bubble when they saw it.”
If in fact these people really are the smartest in the world, we’re in trouble. But this is how the story always goes when the economy collapses or when big companies fall. All the experts watch in shocked disbelief, and proclaim with stunned amazement that we never could have seen this coming.
Yes we could.
We know it’s coming because recessions come. It’s a fact of history. We know big companies will fall because big companies fall.
Schedule a quick 15-minute call with CEO and co-founder Hutch Ashoo
That we cannot predict exactly when recessions will come, or what specifically will cause the next one, is moot. There will be another recession someday. And it will likely come before or during your retirement, if your retirement lasts for any significant length of time (as you most likely plan on it doing).
How could ‘experts’ believe that AOL’s dial-up service would be the last and best form of internet technology? Surely they could imagine a future technology improving upon it and at the very least offering strong competition. In the case of broadband, there was no competition. Dial-up lost before the game even started – it was that lopsided.
When your present performance drives your investment decisions about your future, you are in trouble. That’s what happened to the people who lost big in this merger.
How Do You Prepare for a Recession?
Looking at these three investing lessons, the first two are the easiest to learn. Don’t overly concentrate your portfolio. Spread your wealth across a variety of investments. And find an independent fiduciary financial advisor who has a proper perspective on investing, wealth management, and the unique needs of high net worth families and individuals.
Pillar Wealth Management is one such advisor.
If you want more help choosing a financial advisor, get our free eBook:
Or if you’d prefer a private conversation with Co-founder Hutch Ashoo, you can schedule a conversation, here.
But as for the third lesson, how do you plan ahead for a recession?
Here’s a quick path to navigating a recession without fear, anxiety, or worry:
1. Don’t fall into the 3-step recession-worry sequence
When the market goes up for a long time, as it has recently, many high net worth investors fall into a trap. This path sets them up with the potential for great loss:
- Risk complacency sets in: Things are going well, so they probably always will
- Asset allocations increase in risk: We’re making money, so let’s make even more
- Recession hits unexpectedly: Panic and chaos
2. Don’t build your investment plan on emotions
Risk tolerance is not a feeling. And you cannot build an investment plan that will withstand the effects of a recession, or a major company falling (like WeWork – here’s a more recent story of an epic collapse) , if you build it based on feelings.
3. Don’t bother with present day financial news
You’re building a high net worth portfolio investment and retirement plan that needs to thrive for decades. So who cares what happens today or next week?
Decades. That’s the scale of what you’re building, and how you need to think.
4. Anticipate craziness
When you know it’s coming, you aren’t surprised when market volatility arrives. And, you will not panic and make poor decisions about your wealth.
5. Build a plan that exceeds your goals beyond your lifetime
How do you build such a plan?
Click below to see how Pillar Wealth Management creates 100% fully customized high net worth investment plans.