Business
AOLs online advertising and Internet-access businesses will be separated into an independent, publicly traded company, New York-based Time Warner said today in a statement.
The $124 billion acquisition of Time Warner by Web pioneer AOL in 2001, the biggest takeover in corporate history, led to record losses, shareholder lawsuits and a regulatory probe. AOLs subscriber numbers have since shrunk and its ad sales dropped as competitors such as Google Inc. expanded.
“The merger of Time Warner and AOL represented the peak of the Internet bubble literally months before the Internet bubble popped,” Fred Moran, a Boca Raton, Florida-based analyst at Benchmark Co., said in an interview. “AOL ended up not only having a completely over-inflated valuation but also an over- inflated, inaccurate subscriber count.”
Time Warner, based in New York, gained 4 cents to $23.04 at 12:20 p.m. in New York Stock Exchange composite trading. The stock had gained 3.2 percent this year before today.
Time Warner Chief Executive Officer Jeff Bewkes, who took over last year, is getting rid of AOL to focus Time Warner on the Warner Bros. film studio and cable-television businesses such as CNN, HBO and TNT.
Time Warner wasnt able to sell or find a partner for AOL after talks with Google, Yahoo! Inc. and Microsoft Corp.
Last Resort
“The obvious implication of spinning out all of AOL in one entity is that Time Warners efforts to sell AOL failed,” said Moran, who recommends holding Time Warner shares. “Now, as a last resort, Time Warner is looking towards spinning the whole company out.”
Time Warner prepared AOL for a separation in the past three months, hiring a new CEO for the division and amending debt agreements. The boards approval, announced today, sealed the deal a month after the company said a spinoff was likely.
The move gives the units CEO, Tim Armstrong, a public company to run after he joined from Google two months ago. The transaction will be tax-free for Time Warner shareholders, and needs regulatory approval and the boards final consent of the terms.
When Google bought a 5 percent stake in AOL for $1 billion in 2005, it valued the unit at about $20 billion. Time Warner said last month it was in talks to buy back the stake. Google wrote down $726 million of the investment last year.
Time Warners 95 percent stake in AOL is worth about $6.3 billion, including about $3.4 billion for the ad business and $2.8 billion for the access division, David Joyce, an analyst with Miller Tabak & Co., estimated in a report yesterday.
Armstrong has shuffled AOL executives as he tried to revive the declining business. AOLs access business finished 2008 with 6.9 million paying access subscribers in the U.S., a quarter of the subscribers it had when the 2001 combination closed. It may lose another 550,000 customers this quarter, estimates Joyce, who recommends buying the shares.
The units ad sales dropped 20 percent in the first quarter, after falling 18 percent in the fourth. Operating income declined to $150 million last quarter from $284 million a year earlier.
“AOL is not a toxic asset,” Bewkes said today at the companys annual shareholders meeting in New York. “It is profitable, solvent and will be growing.”
Carl Icahn
Finalizing AOLs structure will allow Time Warner to resume share buybacks, Bewkes said on the companys April 29 conference call. Time Warner finished the first quarter with $7.1 billion in cash after shedding its cable-systems unit.
In 2006, Time Warners former CEO Richard Parsons fought off an effort by investor Carl Icahn to split off AOL as part of a larger plan to break up the company. Parsons said at the time that AOL could be worth as much as $26 billion in the following few years.