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Due Diligence Lessons From AOL, Quaker Oats, News Corp. and Sprint

Thorough due diligence informs educated decision-making, whether in hiring new employees, M&A activities, or partnering with other firms and vendors. It is essential to uncover any potential issues that could affect the success of a decision early in the process.

Lesson #1: Moving Fast is Okay; Skipping Checks Isn’t

In 2004, America Online (AOL) attempted to acquire TimeWarner. However, AOL’s rushed undertaking of due diligence efforts resulted in a failure to account for management issues in running a large conglomerate. The transaction resulted in one of the “greatest merger and acquisition failures” and “biggest due diligence disasters” resulting in a loss of up to $99 billion.

Lesson #2: Conduct Valuation, IP and Competition Analysis

In Quaker Oats’ acquisition of Snapple in 1994, one oversight pertained to an overestimated transaction. Snapple was to be purchased for $1.7 billion, which analysts estimated was about $1 billion more than the estimated market price of the company. Secondly, incomplete intellectual property and competition analysis resulted in the “infringement of fundamental laws of mergers and acquisitions.” On March 28, 1997, the Los Angeles Times quoted Quaker spokesman Mark Dollins who stated, “We believed Snapple had tremendous possibilities. Unfortunately, the synergies did not materialize and [Snapple] did not grow at the rate we anticipated.” The article further noted Quaker’s Chairman William S. Smithburg’s belief that this merger would be successful, as he had previously helped turn Gatorade into a “smashing success” after buying the business in 1983. Altogether, the acquisition resulted in a daily loss of $1.6 million for the duration of ownership, and Snapple was sold to Triarc Cos. for $300 million in 1997.

Lesson #3: Don’t Rely on Hype Alone

In 2005, News Corporation acquired MySpace for $580 million. Although it raised $12 billion in two years, the transactional due diligence overlooked the lack of an “appropriate research and development strategy,” as well as the rise of competition in the market. Particularly, the growth of Facebook outpaced MySpace in a little over two years. Not long after, MySpace traffic fell to about 30% of that of its competitors. On April 7, 2011, Reuters reported on this failed venture, with News Corp spokeswoman Julie Henderson stating, “I think we learned a lot from MySpace but our focus in digital now is how do we take our core businesses and extend them in meaningful ways over digital platforms.” MySpace was sold for $35 million in 2011, with a segment operating loss of $165 million for the quarter ending in March 2011. In response, James McQuivey, an analyst with Forrester Research, stated, “This is a mistake that will repeat itself. I’m not sure that someone being pushed on by early round investors, someone reading their own press, which is praising them, will stop and say, ‘Wait, is this a one-year fad, a two-year fad? Or is this a five-year to ten-year change in the way things are done?”

Lesson #4: Culture and Technology Have a Place in the Deal

In 2005, Sprint Corporation and Nextel Communications decided to merge into Sprint Nextel Corporation, with Sprint acquiring Nextel for $36 billion. During the merger, due diligence failed to address market, culture-related, and technical challenges. For example, sources reported on issues Sprint had with customer service, which, in turn, affected the reputation of Nextel’s representatives. With challenges surfacing not long after the merger, members of Nextel’s management team began to leave the company one after the other. The due diligence failure resulted in Sprint recording a goodwill impairment charge of $29.7 billion in 2008, writing off nearly all of Nextel’s value since the acquisition. On February 29, 2008, The New York Times reported that Sprint’s stock fell by more than 9% following the fourth-quarter loss resulting from the aforementioned write down, and the company suspended the payment of its dividend. Sprint also borrowed $2.5 billion through a revolving credit facility. Daniel R. Hesse, Sprint Nextel’s new Chief Executive as of December 2007, claimed that he “underestimated the severity of Sprint’s challenges […] Like a lot of things, it is tougher than I thought it would be. It’s not a quick fix. I had hoped I could turn it around faster. But I have confidence in the long term.” In the above situations, thorough and comprehensive due diligence efforts may have helped avoid issues that ultimately resulted in loss of investment, revenue, reputation, business, employees and customers. These efforts are effective because they bring forth valuable information and insight, both positive and negative, that could influence the success (or failure) of a new business venture.


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