Time Warner to split from AOL

Board approves plans to spin off Internet unit

Nearly a decade after the ill-fated merger between the media giant and the company that once defined the Internet, Time Warner announced plans on Thursday to formally sever ties with AOL.

The transaction, which calls for the “complete legal and structural separation of AOL from Time Warner,” will be a welcome relief for TW and will put its Warner Bros. studio, Turner cable networks and Time Inc. front and center.

It will challenge AOL to sink or swim on its own as an independent public company without a deep-pocketed parent.

At Time Warner’s annual shareholder meeting, which started in New York just hours after the announcement, a litany of criticism from the audience — which included the occasional crackpot — emphasized just how much the merger still rankles.

“Jan. 11, 2001, is a date that I believe will live in corporate and economic infamy,” one shareholder said. He urged others to press for the ouster of five Time Warner directors who had served on either the Time Warner or AOL board when the deal was hatched.

That resolution didn’t pass, and all directors were re-elected.

Chairman-CEO Jeff Bewkes had to assure another confused shareholder that “AOL is not a toxic asset” and the company is not receiving any federal bailout money. AOL “has cash flow of over a billion dollars. … It is profitable, solvent and will be growing,” he said.

But, starting next year, that won’t be Bewkes’ problem anymore.

AOL chief executive Tim Armstrong called the separation “a great opportunity for AOL. Becoming a standalone public company positions AOL to strengthen its core business, deliver new and innovative products and services and enhance our strategic options.”

“We play in a very competitive landscape and will be using our new status to retain and attract top talent. Although we have a tremendous amount of work to do, we have a global brand, a committed team of people and a passion for the future of the Web,” he said.

What AOL doesn’t have is the strong, dominant position it once had back in 2001. At the time, it was one of the most popular Internet service providers, with 33 million paying subscribers. It dropped that service when too many subs started fleeing and has since become a Yahoo-like homepage for search functions and content.

Its collection of websites ranked as the fourth most popular Netco in the U.S. in April, with 107.5 million unique visitors, according to comScore, besting Amazon and eBay.

AOL clung to a 3% share of the U.S. Internet search market in April, down slightly from the prior month, according to the data from comScore. However, the company has a bigger presence in the Internet display advertising market.

In the first quarter of 2009, Time Warner’s most recent financial statement, AOL’s revenue fell 23% to $867 million. Operating profit sank 47% to $150 million.

The company has been bleeding subscribers for years as customers look to other providers for Internet access. Time Warner itself early on launched a competitor to AOL called Road Runner. AOL now offers its service for free to high-speed customers, and its base of dial-up subscribers has been shrinking faster than the company’s been making money from online advertising.

An economic crisis that’s hit advertising across the board hasn’t helped.

Bewkes emphasized that the move is part of a larger restructuring of Time Warner to make it the world’s largest content producer. It’s already a powerhouse. With 12 new and 14 returning shows next season, Warner Bros.’ TV studio can boost the lion’s share of programs on network television. Bewkes noted the film studio was No. 1 at the domestic and worldwide box office last year; the cable networks are ubiquitous; and HBO won 26 Emmys last year, beating other nets for the top spot six years in a row.

“The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content business,” Bewkes said.

To that end, Time Warner unloaded its remaining stake in Time Warner Cable in late March, creating a separate company.

The split-off of AOL will likely follow that model, although Bewkes said the precise form of the transaction hasn’t yet been determined.

The merger with AOL was announced with great fanfare in early 2000 and closed a year later. It touched off a round of giant media mergers as other companies feared being left behind in a volatile media landscape. Time Warner changed its name to AOL Time Warner.

But the cultures of the two companies didn’t mesh. Revelations of overly aggressive marketing and accounting practices at AOL led to SEC investigations, months of uncertainty and millions of dollars in writedowns even before AOL’s business model itself began to falter. It was seen as a dead weight on Time Warner’s stock price.

Of the architects of the merger, Steve Case, AOL’s co-founder and the first chairman of AOL Time Warner, has kept a low profile since being ousted from the executive suite and later from the board of directors.

Jerry Levin, the Time Warner chief who was CEO of the combined company before he too resigned, retreated to Moonview Sanctuary, a holistic California clinic founded by his wife.

In 2003, AOL Time Warner sliced the AOL off its name and changed it back to Time Warner.

Several rounds of restructuring and a revolving door of CEOs including Jonathan Miller and Randy Falco weren’t able to turn around the company nor Wall Street’s perception of it. Armstrong, a former advertising executive at Google, was brought in recently to add some luster to the name ahead of a split.

As AOL has sought to transform itself, it’s had some success on the content side. And it remains one of the Internet’s biggest players.

Time Warner currently owns 95% of AOL. Google owns the other 5%.

The transaction calls for Time Warner to purchase Google’s stake in the third quarter of 2009 and then, most likely, to distribute AOL shares to Time Warner stockholders.

Michael Morris, an analyst with UBS Securities, said the repurchase of Google’s stake will be “a key valuation event for AOL and Time Warner.” He values AOL at about $4.2 billion. Others have valued it as high as $6 billion.

Closing is contingent on a review process by the Securities and Exchange Commission and the final approval of deal terms by Time Warner’s board of directors.