The dreaded deal

As Warners touts its tentpoles and Gerald Levin celebrates a birthday, the AOL Time Warner casts a long shadow over shareholders from Ted Turner to the U. of California.

Talk about dramatic contrasts: Beginning this week Warner Bros. will be spreading millions of dollars around Cannes (and the Hotel du Cap) to celebrate its “Matrix” and “Terminator” franchises — a major promotional blast from the past.

At roughly the same time, Gerald Levin, the dethroned czar of its parent company, will toss a small dinner party at a modest restaurant in Santa Monica to celebrate his birthday and that of his new girlfriend, Lori Perlman.

Few of his former colleagues are expected to show up; most are still bitter about the “deal from hell” that Levin engineered — the infamous commingling of AOL and Time Warner. Indeed, Levin, once the center of the action, now seems destined for life on the fringe.

The Warners and Time publicity machines continue to grind out upbeat news about the studio, HBO and the magazine empire, only to find these positive developments enshadowed by the Dreaded Deal.

Last week the company wanted investors to focus on a felicitous quarterly earnings report, which showed solid growth (except, of course, for the AOL unit). Instead stockholders were digging in for what promises to be a contentious annual meeting this week with key investors such as Capital Group, opposing the re-election of three AOL directors, including Steve Case, even as Ted Turner, the retiring vice chairman, decided to dump close to $800 million in company shares.

Some investors, meanwhile, were reading a remarkable document just filed on behalf of the University of California — a vividly written legal brief that accuses corporate leaders, past and present, of behaving like they were trained at Enron.

How did the esteemed university get involved? Because it lost some $450 million on its AOL Time Warner holdings even as corporate officers allegedly pocketed $936 million by selling their own shares.

Were these executives mindful of the “tricks and bogus transactions” used to inflate the shares’ value? Damned right, alleges the suit. It was “securities fraud,” plain and simple.

Corporate lawyers doubtless will launch a counterattack on this and the more than 30 other class-action suits that have been brought against the company. Indeed, they’ve already acknowledged that it will take more than a billion bucks to deal with these suits in the interest of corporate survival.

However persuasive the defense, the fusillade of litigation will leave its impact on the public consciousness for a variety of reasons.

First, the allegations attack the credibility not just of past management but of the present one. It’s not just about Jerry Levin or Bob Pittman but about Dick Parsons and his colleagues.

The document also reminds us of such questions as: Where were the directors? Or, for that matter, the accountants? Enough insiders were clearly prepared to profit from the merger — investment bankers like Salomon Smith Barney (a unit of CitiGroup) were savoring their $135 million fee.

The result of their avarice, however, was to erode the economic strength of an important public institution like the University of California system, not to mention public confidence in the free market.

In bloodcurdling detail, the U.C. brief, prepared by the Milberg Weiss law firm, alleges that corporate officers cynically hyped the stock, traded on insider information and overstated online advertising by more than $1 billion. Even as the market was collapsing, Pittman was still proclaiming that “we are benefiting from the current advertising trends in the Internet space.”

The basic scenario of the merger was to enrich top corporate executives, vesting their options and allowing them to sell on an accelerated basis. While telling investors that corporate shares were “undervalued,” these executives were spending $3.1 billion of their company’s money to buy shares on the open market and inflate their price, even as they were dumping 10.7 million shares.

The suit devotes nearly 200 pages to this scenario of greed, quoting Case’s acknowledgement that AOL “pulled off one of the sweetest deals in business history.”

It may have been a sweet deal, but it left a sour taste — one that will permeate Levin’s birthday party and even the million-dollar splurges in Cannes.

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