Aol is Grasping for Salvation

Aol is Grasping for Salvation.

That statement probably wouldn’t surprise many observers, especially after today’s news that Aol acquired the Huffington Post. However, Jim Collins in the highly recommended book How The Mighty Fall defines “Grasping for Salvation” as Stage 4 of 5 in institutional decline. In other words, they’ve almost capitulated into irrelevance.

The former AOL being redefined as Aol in itself was a final grasp for salvation. One behavior that Jim Collins observed was when a company “pins hopes on unproven strategies – discontinuous leaps into new technologies, new markets, new businesses – often with much hype and fanfare”1. If we take a quick look back a few years ago, we’ll all remember that America Online was the internet service provider. Today, they are a media company, focused on chugging out content. It’s as if the former company ceased to exist and today is a completely new company with the same name and stock ticker symbol2.

Collins’ observations of Stage 4 companies continue with companies who “seek a big, ‘game changing’ acquisition (often based on hoped-for, but as yet unproven, ‘synergies’) to transform the company in a single stroke”. Um, over the past few months, we’ve seen an acquisition of the Huffington Post and TechCrunch. Straight from the TechCrunch acquisition press release:

This acquisition will further AOL’s strategy to become the global leader in sourcing, creating, producing and delivering high-quality, trusted, original content to consumers.

and from the Huffington Post press release:

The acquisition of The Huffington Post will create a next-generation American media company with global reach that combines content, community, and social experiences for consumers

I really couldn’t make this stuff up.

Jim Collins continues, that these stage 4 companies tend to “make panicky, desperate moves in reaction to threats that can imperil the company even more, draining the cash and further eroding financial strength.” Huffington Post cost a cool $315 million, with $300 million in cash, and TechCruch cost $25M. This is all from a company, who reported $801 million in cash and short term investments at the end of 2010.

Finally, the Huffington Post acquisition today nailed it by looking to Arianna Huffington to head up the “Media Group” (What? Isn’t Aol a media company as a whole? Would that make her in charge of the company?):

Armstrong continued, “Arianna is a singularly passionate and dedicated champion of innovative journalistic engagement, and a master of the art of using new media to illuminate, entertain and enhance the national conversation. Arianna is a remarkable person and she will continue to create remarkable outcomes for the combined company.”

Straight from Jim Collins observations: “Search for a leader-as-savior, with a bias for selecting a visionary from the outside who’ll ride in and galvanize the company.” I wonder what Arianna will think about Aol’s content farm strategy. Maybe that strategy is the “powerful scale and resources of AOL” that they refer to in the press release.

At this point, I had to stop and read these quotes to my wife because the parallel is uncanny. I won’t even dive into the Jim Collins point that Stage 4 companies “Destroy momentum with chronic restructuring and/or a series of inconsistent big decisions.” I’ll let you make that connection to their amazing new content farm strategy.

So what could Aol do to pull themselves out of this downward spiral?

Jim Collins makes a few suggestions:

  • Formulate strategic changes based on empirical evidence, and extensive strategic and quantitative analysis, rather than make bold, untested leaps.

  • Understand that combining two struggling companies never makes one great company; only consider strategic acquisitions that amplify proven strengths.

  • Search for a disciplined executive, with a (company) bias for selecting a proven performer from the inside

Let’s be honest, the only synergy in Aol’s recent acquisitions is eyeballs. They’re trying to make money off advertisements. That is okay – there are plenty of ad companies making a lot of money. Aol does still has a market cap of around $2 billion.

However, this is Aol’s critical moment.

Don’t mess up these acquisitions. You have an opportunity to own some of the biggest web publications today – Huffington Post, TechCrunch, and Engadget. TechCrunch is a huge blog because they are TechCrunch. The Huffington Post, like ’em or hate ’em, gets their eyeballs because of what they have historically done. Don’t think that Aol knows how to do it better.

Acquisitions fail because of the hubris of leaders in the acquiring company. If your acquisition is truly valuable, know that the company overcame millions of obstacles to be successful. Let them keep doing what they are. Let your acquisition be like Zappos, not Delicious.

If not, all the prophesies will be fulfilled, and you will be irrelevant.

  1. How the Mighty Fall, pp. 90 []
  2. pre Time-Warner Acquisition []
February 7, 2011