Time Warner (NYSE: TWX) and AOL, once considered a most promising pair in media, have decided to call it quits. Time Warner’s Chairman and CEO Jeff Bewkes announced the breakup on May 28, and indicated that the transaction is expected to be complete before the start of 2010.
A dynamic union, or so we thought
The separation of the two companies might feel like the end of an era, particularly to those who remember the sheer excitement the merger generated back in 2000. At the turn of the century, the investment community was all riled up about the Internet, a fledgling media that promised to alter commerce and advertising in dramatic and mysterious ways. AOL was one of the most recognized early movers in the Internet space; the company made its way into U.S. households en masse with a direct-mail onslaught of DVDs that represented a ticket to the oh-so-exciting World Wide Web.
If AOL represented the limitless future of media, Time Warner was the established world order. The best-of-both-worlds relationship seemed as dynamic as that of Pocahontas and Captain John Smith—together, we all believed, they would accomplish great things.
But alas, no. As it turns out, AOL was not as nimble as its young age would imply. First, investors’ frenzied interest in Internet companies went south. Then, the rising popularity of broadband access quickly turned AOL’s dial-up DVDs into useless relics. A reactive transition at the Internet company began, and still continues today.
Irreconcilable differences
AOL’s earnings and potential proved to be disappointing. By the end of 2003, AOL Time Warner had become, quite simply, Time Warner. By 2005, it had become increasingly clear that the two companies had no long-term future together. Still, the breakup remained the stuff of rumors, up until last week’s announcement.
Time Warner owns 95 percent of AOL, and the remaining 5 percent is owned by Google (Nasdaq: GOOG). Google paid a hefty $1 billion for its piece of AOL in December of 2005, but has since written down the investment by $726 million. Time Warner will purchase Google’s AOL stake later this year, and then spin AOL off to Time Warner shareholders in a tax-neutral transaction. The independent AOL will continue to be run by former Google exec Tim Armstrong.
In a press release, Armstrong said the transaction allows AOL to “strengthen its core businesses, deliver new and innovative products and services, and enhance [its] strategic options.”
Time Warner, in the meantime, will face the challenge of redefining itself and its mission. The company’s website currently describes TWX as “parent of AOL and the world's first fully integrated media and communications company.”
Catherine Brock is long on TWX.
