Deal Puts Ball in Icahn’s Court

Jan 2, 2006  •  Post A Comment

Could the deal struck late last month between search-engine company Google and Time Warner’s America Online unit help quell some of the shareholder unrest being fueled by financier Carl Icahn?

Mr. Icahn had made clear in recent weeks that he was opposed to an AOL-Google transaction, saying as recently as Dec. 19 that such a linkup would be “disastrous” if it were to preclude AOL from being able to merge with any number of potential buyers Mr. Icahn deemed suitable-including online auction company eBay or Barry Diller’s IAC/InterActiveCorp.

In addition, Mr. Icahn has advocated spinning off AOL into a publicly traded company as part of a broader strategy to boost shareholder value by breaking up Time Warner into a number of companies.

What impact the AOL-Google deal will have on Mr. Icahn’s fight remains to be seen. An Icahn spokeswoman was not available for comment.

But how to deal with AOL was part of a laundry list of complaints that Mr. Icahn has about how Time Warner was run. The billionaire financier is also pushing for the media giant to increase the size of its stock buyback program and to completely spin off Time Warner Cable, instead of Time Warner’s planned sale to the public of a 16 percent stake in the cable unit.

In recent weeks, though, AOL has been a major focus for Mr. Icahn, who is also seeking to have a representative on the Time Warner board. Citing a recent op-ed piece from former Time Warner Chairman Steve Case in which the former executive claimed that some board members had once floated the idea of selling off AOL, Mr. Icahn has demanded to see copies of minutes of Time Warner board meetings during which the topic was discussed.

However, some aspects of the deal, under which Google will invest $1 billion in AOL in exchange for a 5 percent stake, could help to assuage Mr. Icahn, who has been waging a battle with Time Warner management over the direction of the media giant since the fall.

For starters, the transaction sets the stage for an event Mr. Icahn has been pushing for: selling AOL shares to the public. According to deal terms laid out in a recent filing with the Securities and Exchange Commission, Google has the right to sell its stake in AOL in an initial public offering to the public beginning July 1, 2008.

What’s more, the deal immediately forces Wall Street to rethink AOL’s worth. Though some analysts had pegged AOL’s value at around $10 billion, Google’s investment elevates AOL’s worth to twice that-a nice boost for an operation many had left for dead just six months ago.

And though some observers have raised questions about the $20 billion valuation, arguing that Google might have paid up for the AOL stake to prevent software giant Microsoft from swooping in with a competing offer (Microsoft had been in on-again/off-again conversations with AOL about supplanting Google as AOL’s main provider of search services until Google and AOL reached their Dec. 20 agreement), Google’s investment could help to further buff up AOL’s image in the eyes of Wall Street, which could translate into a higher stock price for Time Warner.

It would be a welcome change: For years AOL has been a drag on Time Warner’s stock, with everything from subscriber losses to accounting scandals at the online unit weighing on the media giant’s shares, even as other parts of the Time Warner empire have flourished.

“Truth be told, Time Warner’s non-AOL assets have performed well over the 2000-to-2005 time frame,” noted Bernstein Research media analyst Michael Nathansan in a research note. “TBS and TNT were repositioned. The DVD cycle and strong titles drove the studio. … Time Warner Cable launched VOIP [Voice over Internet protocol], [digital video recorders] and digital TV. Time Inc. built [magazines] InStyle and Real Simple into money winners.”

Under the terms of the five-year pact, Google will continue providing search functions for various AOL Web sites, as it has done since 2002. In addition, AOL will now sell search advertising directly to advertisers using Google’s search-results technology, which allows advertisers to display ads in relevant search results.

By and large, analysts are praising the deal. Douglas Shapiro, an analyst at Banc of America Securities, said, “[The Google deal] could shore up AOL’s chief strategic holes.”

Word of the Google deal has not helped Time Warner’s stock to any significant degree, with shares up less than 1 percent between the Dec. 20 announcement and last Wednesday’s close. By comparison, Viacom’s widely held Class B shares fell more than 1.6 percent, while Disney and News Corp. shares were largely unchanged.