Analysts and industry observers alike are expressing little surprise over AOL Time Warner Chairman Steve Case’s abrupt announcement Sunday that he would step down from his role as chairman in May.
But whether AOL will have a reduced role in the company’s future, or any role at all, are among the new questions Case’s departure has raised.
Deutsche Bank Securities called the exit, “the end of an era, removing the last ‘AOL’ executive from a major leadership position within the company despite AOL being the acquirer in the AOL/Time Warner merger.”
After months of relentless criticism and pressure on the 44-year-old to step aside as chairman of the troubled AOL Time Warner media merger, Case said Sunday that he would depart after the company’s annual shareholder meeting in May.
“As you might expect, this decision was personally very difficult for me,” he said in a statement. “(A)s an architect of the merger I have felt it was important that I stay the course as Chairman and help get things on track.”
Case’s colleague in weaving the AOL Time Warner merger, Gerald Levin, left his position as CEO of the merged company in 2002 (after resigning in 2001) and was replaced by Dick Parsons. Chief Operating Officer Robert Pittman, who had been dispatched to head AOL in place of Barry Schuler, was ousted in July, 2002. Since January of 2001 when the merger closed, AOL Time Warner’s stock price has gone from about $47.23 to close at $14.88 at the end of trading Friday, a drop of just under 70 percent.
Deutsche Bank called Case’s exit a “minor positive” and noted that the move “fully opens the door to selling or spinning off AOL at some point down the road, though we would expect to see major costs cuts in 2003 before that would be given serious consideration.”
Merrill Lynch media analyst Jessica Reif Cohen wrote that given the dissension within and outside the company “particularly by influential shareholders,” notably major AOL Time Warner shareholder Ted Turner, the decision is no surprise.
“Further, we believe this may ultimately lead to a name change for the company — back to Time Warner — as AOL is just an operating division of the company.”
After Levin’s and Pittman’s departures, shareholders increasingly turned their anger toward Case, arguing for his departure in light of the company’s year-long slide in stock price and the difficulties uncovered in the AOL unit.
Despite the drumbeat of criticism, however, Cohen had praise for Case’s work on behalf of shareholders.
“Supposing the merger/acquisition with Time Warner never took place and in light of market events since then, we question whether AOL would be capable of existing as a standalone company, particularly given the put obligation to acquire Bertelsmann’s share of AOL Europe, which saddled the company with an incremental $7 billion of debt,” Cohen’s note said.
Other analysts were highly skeptical that the company would consider spinning off the AOL division.
“Why now?” said Tom Wolzien, senior research analyst with Sanford Bernstein & Co. “After bleeding like they have for the past year, why do it now?” In addition, he noted Time Warner’s long history of adopting new media platforms, and called AOL another example of that legacy.
“They did it with radio, with TV in the 50’s, with cable, HBO, and now they’ve expanded with AOL,” he said of the Time Warner media holdings, which include publishing, film, programming and television.
“The real question is what is AOL’s strategy for broadband,” Wolzien continued. Right now, AOL now has “half a plan” about migrating its mostly dial-up base to broadband services, he said, referring to AOL’s analyst day in December, at which company executives discussed its broadband plans. “I think it will be another 12-18 months before we really know how that strategy” will play out, he said.
“Spinning off AOL is a terrible idea,” added David Card, senior analyst with Jupiter Research (whose corporate parent also owns this publication). “If you look at big media conglomerates, AOL Time Warner is the only one with a successful network online,” compared to bungled Internet strategies by media companies Bertelsmann and Vivendi Universal.
“I think having an online network will ultimately prove useful for cross promotion of other Time Warner properties. And AOL’s a good business when it works,” Card said.
On the broadband front, AOL has said it is pursuing broadband growth by expanding its distribution arrangements with cable and DSL providers in order to build on the company’s 2.7 million broadband subscriber base.
It is also offering a new “bring your own access” approach to offering the AOL service to customers who use another access provider’s network. For $14.95 a month, the company is offering its AOL service, including its new Instant Messaging client, which is now the home for an integrated menu of multi-media services such as drag-and-drop pictures in e-mail and buddy lists integrated with e-mail. (AOL counts 4 million broadband subscribers including AOL subscribers on “bring your own” access.)
For now, however, the AOL unit has difficulties to work through in order to put two very difficult years behind it. When it announces its fourth quarter and 2002 earnings results on Jan. 29th, the company is also expected to disclose another major charge against earnings to reflect the lowered valuation of the AOL unit. The Washington Post, citing unnamed sources, reported Thursday that the charge would be $10 billion.
Last year, AOL Time Warner recorded a $54 billion write-down as part of its 2001 annual report in order to reflect the lowered valuation of the merger. The charge was considered the largest asset impairment write-off in corporate history.
In October, AOL Time Warner said it would restate $197 million in financial results for eight prior quarters as part of an internal probe of accounting practices from AOL’s dot-com heyday during the late 1990s and early 2000.
Throughout the past year, as its advertising revenues declined, AOL has disclosed regulatory probes into how it booked advertising and commerce deals during the late 1990s and leading into the merger with Time Warner in 2001.
It has withstood a sharp drop in advertising and commerce revenues in 2002 and is expecting another 50 percent drop in ad/commerce revenues in 2003, as contracts, vestiges of dot-com companies striking long term deals, run their course.
Case said “this company does not need distractions at this critical time, and given that some shareholders continue to focus their disappointment with the company’s post-merger performance on me personally, I have concluded that we should take steps now to avoid the possibility of that effort hindering our ability to pull together as a team and focus fully on our businesses.”
Analysts were largely positive about Case’s decision to remain with the company as a director and as a member of a strategy committee that is charged with working on rejuvenating AOL Time Warner as a positive for the company.
After all, with 18 years experience building the present-day AOL into the world’s largest ISP, with a 35 million-member subscriber base and annual revenues of about $9 billion, Case’s input is seen as highly prized as the company works to leverage its online platform with other Time Warner media properties.
“It is not clear how this will impact management,” Merrill’s Cohen continued in a research note. “Does Dick Parsons (AOL Time Warner’s CEO) move up to the chairman role or stay as CEO? Our view is that AOL Time Warner has extraordinary depth of management. On a more speculative note, this conceivably would open the door for strong outside management to enter the picture, e.g. Mel Karmazin as CEO should Dick Parsons become Chairman of the Board.”
Investors had pushed up shares of AOL to $15.19, up over 2 percent, during mid-morning trading Monday.
