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By LuxSit
May 17, 2002

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What is synergy? I guess it's the vertical integration of the parts. What are the parts? Refer to Goofyhoofy's now famous post.

For example. A farmer that raises beef decides he could make more money from his cows if he could sell the beef at retail prices. The wholesale price of beef has been falling. So he buys the local diner so he can get full retail for his product. Now instead of getting 20 cents a pound for his beef, he's getting 8 bucks a pound.

His beef business is doing great, but what he did not realize was that being in the diner business has it's own problems. You have to hire and manage more people. You have to buy the french fries and the ice cream which are going up in price. You have to keep the building maintained and pay the mortgage. And you have to wash the dishes...sometimes yourself...cause you can't get good help these days.

So did farmer John make the right decision? He's making more money on his beef, right? On the beef he sells in the diner. But he still produces more beef than the diner sells. So the vertical integration, or synergy is not realized. Plus now he has to not only manage the farm but he has to run the diner too. He has very little time left to enjoy life.

As it turns out the diner business is not worth as much as he paid for it. Business is falling as the economy contracts. Overhead is fairly constant due to mortgage and maintenance. It turns out that the person that managed the diner before he took over understood the diner business better than him. And because of that the profits on the books when he bought the business have evaporated.

As a result, farmer John is probably better off selling the diner and getting back to what he knows best...raising beef. The synergy he had projected never materialized, and in fact he ended up losing money. The value of the diner went down as the books were no longer able to show a profit. Nothing that a $53 billion dollar write down can't fix, but I think you get the idea.

AOL has not realized any synergy from its parts. How is the Internet service provider going to make money from the old Time Warner company? How is the old Time Warner going to make money from the ISP?

Will TW content be available only to AOL customers? How do they make money from this exclusivity? Will TW cable systems only provide AOL as an ISP? Don't think the regulators will allow that. What are the synergies? How do they make money from these synergies?

I'm having a hard time identifying any. What I do see though is that each of the separate businesses can make money without the synergy. But that is going to take good old-fashioned great management to keep the bottom line above water.

Does an ISP manager understand the movie business? The cable business? The magazine business? Do managers from these groups understand how to make money from the ISP?

If AOL-Time-Warner is going to make money they're going to have to follow the lead of other great mega companies. Take GE and former CEO Jack Welch. What was the key to success in a diversified business like GE? Great people throughout the companies and the divisions. Each division is treated like a separate company and is managed as such. Yes it is great management that will win the day.

Does AOL realize that they need a diversified management group? Will they allow the divisions to manage themselves? I'm thinking that Time-Warner's management prior to AOL was fraught with infighting. That cooperation amongst the divisions was not really there.

Synergy? What synergy?

What AOL-Time-Warner needs to do is manage. That will be the key to success. You need a CEO that knows people. One that will let each of the divisions maximize their contribution to the bottom line. I think that this is going to require that management throughout the company take on a new look. That is going to be a tough job. You're going to have to break up the old culture in management. You're going to have to streamline. You're going to have get the people in there that can get the job done. You're gonna have to make money the old fashioned way...earn it! The question is: Can Parsons be the Jack Welch of AOL-Time-Warner?

Times have changed. The Internet stock market bubble has burst. There won't be anymore ISP mega-companies of the day buying up old guard media companies with inflated stock price chits. AOL was able to pull off the deal of the century using their inflated wealth, but look they have to pay the piper now...$53 billion dollars worth. Where's the synergy here?

AOL will be a "Buffet company" when AOL shows it can manage the bottom line. Where's the profits? What are the potential profits?

In other words, Where's the beef?

Good Luck,

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