The mere mention of America Online (AOL
) in the corridors of AOL Time Warner Inc. these days is certain to stir up vitriol. The grand vision for the marriage of Old and New Media has been a bust for months, but disappointments in AOL continue to drag down all of AOL Time Warner.
Now, there's talk that one of the deal's most vocal salesmen, Chief Operating Officer and former AOLer Robert W. Pittman, may soon be leaving the company. For some, Pittman's departure could certainly serve as a rallying cry to jettison AOL, too. The company's cable, entertainment, and publishing businesses by themselves should be fetching around $17 a share in today's stock market, based on shareholder and analyst estimates. But thanks to the cloud over AOL, the stock was worth $13 on July 16, a 72% drop from when the merger closed 19 months ago.
So why not undo the deal and unleash the value of the old Time Warner? After all, the concept of media convergence is as discredited as former Vivendi Universal CEO Jean-Marie Messier, whose empire-building ended abruptly with his dismissal last month. Announcing a divorce would surely provide relief for Richard D. Parsons, the new AOL Time Warner chief executive who is nowadays spending countless hours trying to buck up dispirited employees and investors.
But is AOL the albatross it seems? Maybe not. It makes money. It helps sell Time and People magazine subscriptions and generates buzz for Warner Bros. movies, such as the coming sequel to the Harry Potter blockbuster. It also holds the promise of future profits if media content is one day delivered primarily via the Internet.
Perhaps more significant, there is no attractive way to cut AOL loose. The unit isn't going to fetch a good price in today's market, a couple of bucks a share at best. Nor is it clear that investors would want shares in a newly orphaned business. "Time Warner got taken at the top by selling to AOL," says Gordon Hodge, analyst at Thomas Weisel Partners. "But selling AOL now would just be mis-timing things twice. They need to gut it out."
That won't be as hard as it looks, considering AOL's assets. AOL has 26 million U.S. subscribers, more than the next nine largest Internet service providers combined. Subscribers pay nearly $6 billion a year in fees. Online advertising this year is expected to bring in $1.8 billion in revenues even after plunging 31% from last year. After marketing, product development, depreciation, and other expenses, operating income should still be about $1.5 billion from the U.S. If AOL were charged for, say, one-fourth of the corporation's total interest expense and corporate overhead--and even an extra $100 million if it joined the new bandwagon and expensed stock options--it would still make nearly $900 million this year in the U.S. before taxes. Compared with the company's cable systems, the AOL business requires little capital spending to keep going. Kiki Li, an analyst at SoundView Technology Group, says the subsidiary still has "value," figuring it's worth at least $4 a share.
All bets are off, of course, if AOL's reported numbers turn out to be wrong. AOL has a history of credibility problems with its financial reports, which itself is a drag on AOL Time Warner's stock price. In May, 2000, the company agreed to pay a $3.5 million fine to settle accusations by the Securities & Exchange Commission that it had capitalized marketing costs instead of counting the expense against earnings. More recently, the reliability of its tally of 34.6 million worldwide AOL subscribers has been questioned. AOL counts free-trial subscribers among its numbers, pumping up apparent growth.
Parsons won't soon be done soothing jittery and restless investors, especially in these roiling markets. And true, AOL may never live up to the original hype. But the new CEO should be able to make the case that the Internet company is a keeper.
Lowry covers AOL Time Warner, and Henry writes about finance, from New York.
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Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
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