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AOL Time Warner's Year-End Whammy

Which is more jaw-dropping? AOL Time Warner's announcement Wednesday that it lost nearly $100 billion in value in 2002, or the surprise news from media mogul Ted Turner that he would resign as a vice chairman at AOL Time Warner?

Both are stunners, analysts said, as they digested the double-barreled news that emerged from AOL Time Warner's fourth quarter results Wednesday.

Minutes after announcing that it would take goodwill charge of $45.5 billion against fourth quarter earnings, mostly to reflect the lowered value of the AOL unit, AOL Time Warner said Ted Turner, the 64-year-old media mogul who founded CNN (now an AOL Time Warner unit), would resign as a vice chairman.

Combined with the $54 billion asset-write down AOL Time Warner announced in the first quarter of the year (due to AOL's lowered market value), the combined loss comes to just under $100 billion in goodwill write offs for 2002.

"This would be like somebody walking into the office of the U.S. President and saying, 'Mr. President, we've the lost the Pacific Northwest,'" said Richard Doherty, research director for Envisioneering Group, a consultancy.

"This is unprecedented. I've never heard a management team deliver such bombastic news in such a calm manner," Doherty added of the goodwill charge. "I can't speak for Ted Turner, but it's as though he's...saying he doesn't want to be a part of this club" anymore.

Turner, legendary founder of CNN who is regarded as a visionary for his role in developing the cable industry, said in a statement Wednesday he wants to devote himself to his philanthropic activities.

"Over the last five years, it has become even clearer to me how much personal satisfaction I derive from these activities. Therefore, I would like to now devote even more time, effort and resources to them," he said.

Tom Wolzein, senior media analyst with research firm Sanford Bernstein, called the Turner decision "bad and sad. It shows the company is losing some of its entrepreneurial foundations."

As to the size of the write-off, Wolzein said the year-end result reflects the market, still adjusting to the correction in valuations that began three years ago when the Internet bubble burst.

"As an investor issue, if two years ago you might have known about the write-down, you wouldn't have bought the stock. This is now acknowledging what happened to the market."

By midday Thursday, shares of AOL Time Warner had tumbled 13.5 percent to $12.07. They would later close at $12 on the day, down 14 percent from Wednesday's close.

Merrill Lynch media analyst Jessica Reif-Cohen, in a next-day research note, said although the Turner announcement was not unexpected, it ranks as another net-negative for the company.

"Not only is Turner a visionary in the media industry, he has been proactive and vocal on several fronts as both a board member and large AOL TW equity shareholder," Cohen wrote. "We believe his presence from a macro and strategic perspective will be missed."

Deutsche Bank Securities, reportedly among investment banks helping to underwrite the Time Warner Cable IPO planned for this year, made brief mention of AOL's $45.5 billion goodwill write-down.

In a next-day note, analyst Douglas Mitchelson wrote, given that "our valuation of the AOL division only reflects $8 billion based on our 2003 estimates, a significant write-down was appropriate in our view."

Whether Turner plans to leave the board of directors was unclear in his announcement.

An AOL Time Warner spokesman said Chief Executive Richard Parsons expects Turner to remain on the board. The two will meet in coming weeks to discuss the matter.

That question is key, say analysts, given the interest in what Turner may do with his estimated 132 million shares of AOL Time Warner stock, just over three percent of shares outstanding.

Turner's charitable works, such as donating stock to philanthropic causes, have been hurt by the 70 percent slide in AOL Time Warner's stock price in the past two years. He has been a vocal critic of Steve Case, the AOL founder who recently announced he would depart as chairman of AOL Time Warner in May. As a corporate executive, he only has so many windows in which to sell company shares. As a departing corporate executive, his opportunities to sell are greater.

Cohen also noted Turner's exit may make it easier for AOL Time Warner to sell some non-core assets to raise cash and manage $26 billion in debt. That may include sports teams as well as AOL Time Warner channels Comedy Central and Court TV, assets Turner has been reluctant to part with.

"It may pave the way for a merger with CNN or ABC, which we would view as a deal born out of weakness rather than strength," said Cohen.