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.

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