The battle for the breakup of media giant Time Warner (TWX) kicked into high gear on Feb. 7. Carl Icahn, who is spearheading the campaign, along with his advisers at investment bank Lazard (LAZ), issued a study that says the media giant has badly underperformed the market and should be broken into four pieces.
It was the first time that Icahn -- a financier who made billions with 1980s-era hostile takeovers of such companies as TWA, USX, and Texaco -- publicly detailed exactly what he wants to do with Time Warner.
"I LOOK FOR NO-BRAINERS." The 342-page analysis, summarized by Lazard Chairman Bruce Wasserstein, says Time Warner should be broken into networks and filmed entertainment, cable-TV systems, publishing, and the AOL Internet division. The study also says Time Warner stock buybacks should be boosted to $20 billion, and costs should be slashed.
Icahn's push to revamp the media giant mirrors a larger trend toward greater activism on the part of investors (see BW Online, 1/30/06, "Icahn's Korean Campaign"). Icahn is taking a much more public role in agitating for change, after keeping a lower profile in recent years.
"Over the years, I have followed a very simple philosophy," the multibillionaire investor told the analysts, investors, and reporters who packed a conference room at the posh St. Regis hotel in Manhattan. "I look for no-brainers...where there's a discrepancy between the price and what the company's worth."
STOCK SLIP. Though Icahn commissioned the report, he didn't shape its conclusions, Wasserstein said. "Our recommendations would have been the same if we had been engaged by the Time Warner board," Wasserstein insisted. But Icahn endorsed them wholeheartedly: "It's a brilliant report," he quipped. "Brilliant because I agree with it."
Investor anguish over Time Warner goes back to the late '90s. The company's stock soared from $10 to $100 during the dawn of the Internet, but crashed after it announced its $156 billion merger with AOL. Wasserstein said the company has underperformed the market, especially since Chief Executive Richard Parsons took the helm in 2002.
Since then, Time Warner shares -- which closed at $18.36 on Feb. 7 -- have declined 8%, while the S&P 500 has increased 17%.
WARY OF RISK? Wasserstein said diversified media stocks have lost 1% of their value during that period, and that a weighted index representing comparable companies has increased 43% (see BW Online, 12/19/05, "Time Warner: Still Searching for Answers").
Wasserstein said the Time Warner board gave Parsons a flawed mandate to cut costs and preserve cash flow. He said the company, jolted by the AOL debacle, was unwilling to take risks or sufficiently invest in its businesses, and that it had missed one opportunity after another -- such as the chance to buy AT&T's (T) cable-TV systems, or to use AOL's leadership in instant messaging to enter the market for voice over the Internet.
Time Warner's cable business has a different strategy for Internet-based phone calls. That's evidence that conflicting interests within the conglomerate structure have harmed the its performance, according to Lazard's analysis. Wasserstein also took the company to task for selling businesses such as Comedy Central.
"ON THE RIGHT PATH." If Icahn prevails, former HBO and Viacom (VIA.B) chief Frank Biondi, who sat next to Icahn at the meeting, would run the company. Biondi's brother Michael runs the investment banking unit at Lazard. Icahn, who said Parsons has made a mistake by hedging his bets on different technologies and strategies, believes that great companies don't wait to react. "It needs to be run by a visionary," he said. "You want someone who can actively make things happen."
Icahn said Parsons was "in love" with the conglomerate structure, and too enamored of the company's massive and ritzy new headquarters at Columbus Circle in New York. "They do travel first-class at Time Warner," Icahn said, arguing that overhead had increased 40% since the beginning of 2002.
"CHILLY RECEPTION." Icahn said Time Warner has underperformed, despite the fact that it has premier assets. The company's franchises include HBO, CNN, Time Warner Entertainment, and Time magazine.
The media conglomerate issued a statement saying it would "carefully and thoroughly" review the document. It defended its strategy: "We are on the right path. The company is delivering." But it also said, "Our board and management regularly review all of the strategic options for managing this company to create the greatest value for our shareholders." That could give Time Warner leeway to offer concessions down the road.
Icahn and Lazard have an uphill battle. Icahn and his allies only control 3% of Time Warner shares. And judging from the immediate response, it will be difficult to build a majority that can take control of the company. "It was a chilly reception," said Susan Kalla of Caris & Co. "You could tell by the questions." Kalla said she favors a Time Warner breakup, but that the timing might not be right.
CHOOSING SIDES. One analyst questioned whether a breakup made sense. Richard Greenfield of Pali Research wanted to know why a conglomerate model, like the one created by News Corp. (NWS), made more sense. Rupert Murdoch's empire includes satellite distribution, publishing, and filmed entertainment, as well as a growing Internet business (see BW Online, 1/17/06, "Can Murdoch Win on the Web?").
Wasserstein said any synergies between distribution and content could be duplicated by commercial partnerships, and that it wasn't necessary to keep them under one roof. He also argued that it isn't surprising that investors have kept their plans quiet and their options open. But, during the next few weeks, investors will have to take sides. And then the battle for Time Warner could get really interesting.