Fifteen years ago this month, at the height of the dot-com frenzy, AOL and Time Warner announced the consummation of a merger that had everybody talking. Time Warner, desperate for some on-line sizzle, thought they had found their answer in their younger partner. AOL, flush with a high market capitalization, used that inflated stock value to purchase the far older and more established company, thinking that synergies between AOL's distribution network of dial-up Internet access and Time Warner's content would create a winning combination. What could possibly go wrong?

Well, as it turns out, a lot. Even though the numbers looked pretty good, the company, as a member of their legal team told me in an interview I did in 2003, never did its cultural due diligence. Worse, as was later discovered, AOL was doing some pretty creative accounting with its actual ad revenues. Even worse, though no one knew it at the time, the merger was completed only a few months before the dot-com crash. Ad revenue dried up and nobody would touch Internet company stocks with a ten foot pole. The value of the combined company plummeted from $226 billion to a more realistic $20 billion. And AOL, in 2002, had to write down goodwill to a then-record-breaking nearly $99 billion. If the two sides didn't like each other much before, many of them hated their counterparts after the crash.

While this merger was particularly striking for the value lost, we've seen this movie many times. I think it offers some useful lessons for entrepreneurs and lessons learned from studying many such failures over time. Think about the following questions.

What are the critical assumptions underlying your decisions? Have you tested them? In the case of AOL, nobody questioned whether having access to a digital platform would increase the revenue the combined company would receive through higher prices, more subscribers or greater customer 'stickiness'. This assumption was simply accepted as a done deal, never investigated.

Are you getting pushed into an all-in bet when a staged or sequenced approach might be more prudent? The merger was an all up front, all in, "go" before even some members of the leadership team were told. The companies could have done an alliance and tested some of their ideas. They could have done a proof of concept joint project. They could have tested several different business models and seen what the results were. Since the merger took a year to gain regulatory approval, there was plenty of time to validate the business assumptions, but this didn't happen. Further, in any business merger, as you learn about your prospective partner, new information is revealed. The decision-makers need to act on this new information, not ignore it. In the case of this merger, even though it was quite obvious that dial-up Internet was going to become obsolete, nobody changed the revenue projections accordingly.

Are your leaders willing to hear dissenting points of view? There seems to have been no doubt whatsoever on the part of Stephen Case and Gerald Levin that this was a transformative, industry leading combination. Objections from doubters were not tolerated. In fact, one such possible doubter, Ted Turner, was summarily ousted from his leadership position and relegated to a much smaller role in the combined company. Later on, he would end up being one of the biggest financial losers in the wake of the failed merger.

Are you throwing all the money in up front? The two companies didn't have to do a full-on merger and create a new entity right off the bat. They could have done an alliance, they could have done a joint venture, or they could have spun out a test company. Instead, they went for it in the heady spirit of the age, convinced that the first-mover effect would be decisively in their favor.

Are you making decisions under conditions of massive time pressure? When you think the window of opportunity is running out, you are much more likely to make a hasty move than if you think you have time. Everybody at that time thought the first company to get the merger of content and on-line distribution right would lock up the market in their favor.

As I always like to say to my students, mistakes and failures are inevitable. But why make the same mistakes over and over again? Think about these questions the next time you're tempted to make a big splash on the next big thing.

Published on: Jan 22, 2015
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