Tuesday, December 13, 2005

AOL Still Hasn't Made Up Its Mind

I backed myself into a box yesterday by writing two blogs--one on AOL and the other on HarperCollins. Guess I need to follow up on both stories today.

Let's start with AOL. BusinessWeek Online (BWO) reported yesterday as follows: "Efforts to find a partner for Time Warner's AOL Internet unit are taking longer than expected . . . The media giant has been in discussions with Google and Microsoft, which are both interested in creating a joint venture with AOL. Time Warner had hoped to begin exclusive talks with one company or the other by Friday, 12/9 . . . that timetable was 'optimistic.'"

The BWO article said that, as of Sunday, both Google and Microsoft were still in the running, and it may not be possible to nail a deal down before year's end.

Google is a motivated negotiator. If Microsoft edges them out, Google will lose its role as AOL's search engine to Microsoft's MSN. That partnership with AOL accounted for 11% of Google's revenue for the first half of this year.

To complicate matters, Time Warner is under attack from activist stockholder and billionaire investor, Carl Icahn. Mr. Icahn--who with partners owns almost 3% of Time Warner's stock--has been putting enormous pressure on the board of directors. He believes that Time Warner should be broken up into its constituent parts.

In a surprise move, on Sunday, Steve Case, the co-founder of AOL, wrote a controversial article for the Washington Post (WP). In early 2001, Case managed the merger between Time Warner and AOL, becoming the executive chairman of the new AOL Time Warner. Two years later, following the reporting of an enormous loss for 2002, Case was forced to resign, and the company dropped the AOL from its name. Case remained on the Time Warner board of directors until 10/31 of this year.

In his newspaper article (entitled "It's Time to Take It Apart"), Case joined Icahn in pressing to break up Time Warner. He proposes splitting "the conglomerate into four freestanding companies--Time Warner Cable, Time Warner Entertainment, Time Inc. and AOL--each with its own strategy, stock, balance sheet, management team and board." (WP)

Referring to the possibility that Time Warner would sell a minority stake in AOL to Microsoft or some other investor, Case says, "'Given that Time Warner failed to capitalize on AOL's potential during a period when it owned 100 percent of AOL, it seems doubtful that a scenario in which it has a lesser, but still controlling, stake will work better.'" He closes by saying, "It is time for a change at Time Warner. For the sake of shareholders, employees and customers, the best option now is to liberate the disparate businesses and let them compete on their own." (WP)

I don't envy the Time Warner board. On one hand, they have Microsoft and Google champing at the bit. On the other, they have Carl Icahn--a notorious corporate raider--along with their own former executive chairman arguing to break up their company. In between are the thousands of stockholders to whom they must answer.

BusinessWeek Online says it well: "In a business where the top four players [AOL, Yahoo, Microsoft and Google] are roughly equal in size, combining two of them into an Internet powerhouse could yield huge strategic and financial benefits--and establish the dominant player in the medium of the future."

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