Was Time Warner that dumb? Or was the Disney fracas a ruse?

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Remember the Time Warner-Disney dustup of a few weeks back? You know, the contract dispute over carriage of and payment for Disney's TV networks by Time Warner's cable systems, which ended with Time Warner blacking out ABC during sweeps week?

Most observers believe Time Warner was out to break Disney. I take a more Machiavellian view. I think Time Warner was out to break up its pending marriage to America Online.

It doesn't take a genius to see that what looked in early January like an interesting deal for Time Warner shareholders today, in May, appears to be tarnished hornswaggle. Just before the merger was announced, AOL shares were trading at $72; as I'm writing this, they're hovering around $55--which means Time Warner shareholders have already lost some $40 billion in the value they were to have realized. Time Warner shares, meanwhile, soared on the news; long undervalued, they climbed from $63, settling in at the end of that frenzied January week at $82--more or less where they live today.

Meaning? Time Warner shareholders, including 61-year-old Chairman-CEO Gerald Levin, have already received their acquisition premium--a premium that will evaporate once the deal closes and they are subsumed within a company that, however advanced technologically, remains a managerially weak, strategically amorphous black hole.

If share price isn't a fair barometer of the deal's quality, one need only refer back to the best (yet curiously overlooked) financial analysis of the purchase, by Fortune's Carol Loomis. A Time Warner employee, and probably the best business writer in America, Loomis looked at the combined earnings for the two companies, subtracted non-recurring gains and concluded the putative AOL Time Warner was trading at a ludicrous 300 times earnings. At a more rational P/E ratio of 20, for investors to average a 15% return over 15 years against real growth the combined company would have to reach a market cap of $2.4 trillion.

Ayup.

Taken together, I conclude this: The value of TWX's shares has already been unlocked. The value of AOL's shares will never be realized. The only way Time Warner can save itself is to break up this marriage--on the altar, if that's what it takes. What better way to scotch an increasingly ugly arrangement--but avoid a multi-billion-dollar breakup fee--than to get the Feds to nix it on antitrust grounds? And what better way to accomplish that than to pull a monopolistic stunt like dragging ABC off the air in such major markets as New York and LA?

Oh, I admit this is speculation--a fantasy, even. Time Warner employees' shares vest when the deal closes, giving many a reason to stay with it. Most of those with whom I've spoken--even well-endowed retirees--didn't dump their shares when they soared that first day, and have continued to hold on. Still, more than a few have to be wondering whether it's time to cut and run.

Including Jerry Levin. There are few CEOs as politically astute as Mr. Levin, whom history shows to be the talented Mr. Ripley of the media business. One by one, he has managed to kill off every potential competitor, every seasoned rival, for his throne--from the previous CEO, Nick Nicholas, to HBO overseer Michael Fuchs, to the heads of the Warner Bros. studio, Bob Daly and Terry Semel. All ran powerful divisions of the structurally weak conglomerate, divisions they'd built from near (or, in the case of Fuchs, actual) nothingness. All, at one point or another, had come to Mr. Levin's aid when he seemed to be losing his board's favor, promising the seemingly hapless CEO their support in return for what they believed would be his. All are now rich--and retired.

It's inconceivable to me a man with such survivor skills--an executive who must eat a page from "The Prince" at each breakfast and sup on Sun Tzu every evening--could have committed a blunder as downright dumb as the Disney howler. Not only did he pull Regis Philbin off the cable box--he put signs on the screen taunting the audience with his audacity. Mr. Levin managed the unthinkable: to make Disney's Michael Eisner seem an aggrieved party.

No, a sane CEO doesn't do stuff like that, except for a purpose. And there can only be one reason, really: to stop the deal. Still don't believe it? Consider one more thing Mr. Levin did the week he axed Disney: he named Bob Pittman co-chief operating officer.

Need I say more?

Mr. Rothenberg can be reached at rothenberg_randall@strategy-business.com.

Copyright May 2000, Crain Communications Inc.

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