June 22, 2003
AOL Merger: Dissecting a Deal That Soured
THE NEW YORK TIMES
http://www.nytimes.com/2003/06/22/business/yourmoney/22SVAL.html?th
THE wreckage of America Online's misbegotten takeover of Time Warner for
stock now appears the greatest enduring monument to the folly of the
Internet boom. And Alec Klein, a reporter for The Washington Post, already
has a place in its history.
Last July, he wrote a groundbreaking series of articles in The Post
describing adventures in creative accounting by the AOL service's online
advertising sales team around the time of the merger. Within weeks, AOL Time
Warner acknowledged that both the Securities and Exchange Commission and the
Justice Department had begun investigations into its books.
To many shareholders and executives who came from Time Warner, the news
raised the troubling possibility that AOL may have duped them by
exaggerating its results, and the investigations became a turning point in
the internal battles that culminated in the resignation of Stephen M. Case,
AOL's founder and the company chairman.
In "Stealing Time" (Simon & Schuster, $25.95), written and published in just
11 months after his newspaper series, Mr. Klein has set out to expand it
backward and forward into a history of the deal. The reporting behind those
articles is the greatest strength of the book, but it reads more like a
disjointed string of newspaper features than a single, novelistic narrative.
But Mr. Klein does add a contemporary interview with Gerald M. Levin, the
former chairman and chief executive of Time Warner who agreed to the deal.
"I'm the one who got up and said - and there are people who play this back
all the time, when we announced the deal - `I believe in the Internet and,
therefore, I believe in these values,' " Mr. Levin tells Mr. Klein. "Well,
that was a terrible thing. Well, at that time, it made sense, and over time,
I still think it will."
Mr. Levin's reputation has taken some blows from a chorus of rueful Time
Warner executives and directors who complain that he did not tell them
enough about what the company was getting into, and in this account Mr.
Levin does not dispute that he forged ahead on his own. "Probably my style,
when I really believe in something, is to pretty much barrel ahead, that's
certainly true," Mr. Levin says. "It wasn't the kind of thing where we had
to get buy-in or consensus, because it's kind of dramatic in and of itself."
Mr. Levin takes responsibility for sticking with the company's most
ambitious projections for the first year after the merger even when his
chief financial officer warned that the targets were becoming harder to
reach.
Mr. Levin still expected a rebound, he says. "I mean, who knew?" he asks.
Mr. Klein provides a few memorable snapshots of Mr. Levin and Mr. Case in
action. During the regulatory approval process, when a member of the Federal
Trade Commission chided them for Time Warner's decision to shut off ABC in
New York cable systems during a dispute with the network's corporate parent,
Mr. Case punched Mr. Levin in the arm and said, "Way to go, Jerry."
In retrospect, Mr. Levin says, "Steve and I were not the best team."
But for much of "Stealing Time," the principal players in the merger cede
the stage to less central but more colorful deal makers inside the AOL
service who were the focus of The Post's series.
The biggest frustration of the book is that Mr. Klein fails to fully
integrate the two casts of characters. The story of the increasingly
aggressive accounting within AOL remains out of sync with the simultaneous
story of the merger in the executive suites, and the disjointedness detracts
from the clarity and drama of the overall narrative.
What did Mr. Case and his top lieutenants know about the precarious
financial situation hidden in AOL's books, and when? Those are the questions
that the S.E.C., the Justice Department and shareholders' lawyers are
asking. They are also central to any attempt to understand the motivation
and ethics of the executives who put the deal together.
But Mr. Klein waits until after a detailed history of AOL's rise, the merger
agreement, the shareholder votes and most of the regulatory approval to drop
back in time to the situation within AOL in late 1999, when Mr. Case first
approached Mr. Levin. Mr. Klein convincingly portrays a climate of mounting
pressure within AOL as the boom in Internet advertising began to fizzle. But
he does not quite complete the picture of what Mr. Case or Mr. Levin knew
about the situation at the time.
As of a joint board meeting in July 2000, Mr. Levin recalls, "the AOL
numbers were terrific, and you would've come away from the meeting saying,
`Wow, we hope the Time Warner businesses can keep up.' "
N October, Mr. Case was still publicly assuring investors, "AOL's
advertising growth is right on target," possibly benefiting from a "flight
to quality" as other Internet businesses imploded.
By the end of 2001, it was clear that AOL's business was collapsing,
dragging down AOL Time Warner's stock by more than 70 percent.
Fortunately for readers still curious about what Mr. Case was thinking,
there are at least three other books on the star-crossed AOL Time Warner
merger on the way.
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