When President Bush declared on Monday that the nation was waking up with a hangover after the economic boom of the last decade, he could not have known how much more pain was on the way. By week's end the stock market had plunged a further 7 percent, reaching lows it had not seen since 1998.
One of the week's biggest losers was AOL Time Warner, a company whose stock has been in virtual free fall all year. In an attempt to turn around its own flagging fortunes, AOL Time Warner announced a major management shake-up, designed to take the company in a new direction and undo the damage of a merger that now stands as one of the biggest blunders in corporate history.
Of all the giddy corporate moves of the 1990s, none now look more wrongheaded than Time Warner's decision to sell itself to AOL in a deal that put a higher value on the now-struggling Internet service than on Time Warner's vast stable of blue-chip media properties. After years of fumbling to come up with an online strategy, Time Warner decided to thrust itself into the New Economy by combining with AOL. Unfortunately for Time Warner shareholders, the CEO, Gerald Levin, chose precisely the wrong time to make his move.
With AOL stock near its peak, he accepted a deal in which his shareholders were given just 45 percent of the combined company, even though Time Warner's divisions produced some 80 percent of the revenues.
The credo of the combined AOL Time Warner was synergy, the idea that the companies would be greater than the sum of their parts because each of the divisions would help market the others. But the dream never materialized. The fast-growing AOL online service was supposed to be the juggernaut that would cause the whole company to grow at 30 percent a year. It turned out that AOL was unable to sustain its own growth rate, much less carry Time Warner.
AOL Time Warner has taken a beating since the two companies combined. The stock has plummeted. In January management was forced to announce a US$54 billion goodwill write-down, a stunning admission of just how bad things had gotten. To turn things around, Stephen Case, the company chairman, and Richard Parsons, the newly installed CEO, will need to win back the trust of Wall Street.
With this week's personnel changes, Parsons -- who himself came from Time Warner -- forcefully reasserted the dominance of Time Warner culture within the merged companies. He accepted the resignation of the chief operating officer, Robert Pittman, who came from the AOL side, and divided Pittman's job between Don Logan, head of the Time Inc. magazine division, and Jeff Bewkes, chairman of HBO. Tellingly, the AOL online division will now report to Logan, who has spent his career in print and once said the Internet gave "new meaning to the term `black hole.'"
Logan and Bewkes are expected to decentralize operations and emphasize strong media content.
Shareholders may welcome the new direction. Still, two new appointments do not make a turnaround.
Parsons has yet to enunciate a clear vision of where he wants to take AOL Time Warner.
Before anyone gets too excited about the restoration of Time Warner culture, it is worth remembering that it was Time Warner management that blundered into the AOL deal in the first place.
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