There Must Be a Pony in Here Somewhere

by Kara Swisher

  The only big worry the AOL deal makers had was that such a small deal would not give AOL enough assets and also that it would make them only a bigger Internet power. But AOL’s ambitions were much larger. And there were concerns at eBay, too. “We did not know what a large company was going to do to us and were still trying to figure it out,” said one eBay insider involved in the talks. “The question was, did we want to be attached to someone else’s ocean liner?” Talks continued into December with a planned visit after the New Year to AOL by eBay’s executive staff. But Case and others were unmoved. “What’s the point?” Case told his staff. “It doesn’t help us in broadband and it hardly moves the needle.” Plus, as WorldCom’s John Sidgmore pointed out, “Case really believed in the huge value in Time Warner’s content.”

  So the needle mover was still Time Warner. Still unhappy that things had gone astray in the far-and-away sexier deal, Case urged Novack to reestablish contact with Bressler and see if they could break the impasse and keep the deal alive. AOL’s stock by now was swelling to almost ridiculous proportions, hitting an all-time high in mid-December. AOL had to buy something big and buy it now. Levin agreed to the overture by Bressler and wanted to bring in Dick Parsons more actively and get his assessment. A steady and dependable executive, the tall and imposing Parsons was known for his gentle manner and diplomatic skills.

  The two sides scheduled a meeting in Novack’s Boston office for December 23—two days before Christmas and a week before the millennium New Year’s celebration, the biggest ever. In attendance were Novack, Mike Kelly, and Salomon banking heavyweight Eduardo Mestre for AOL, and Bressler, Parsons, and Morgan Stanley banker Paul Taubman for Time Warner. Parsons, several people at the meeting remember, immediately affected a professorial air with no judgments, making it easy to lay everything on the table. “Tell me all about it,” he opened. The two groups started hashing out the various roadblocks, which mostly centered on figuring out the right exchange ratios, considering the disparate valuations. After taking in everything, Parsons was quiet for a moment, and then told the AOL side that Time Warner would get back to them after the holidays. His biggest issue was over getting equal board power and also making sure Levin remained CEO, according to sources familiar with Parson’s thinking.

  And so AOL waited, as Levin, Parsons, and Bressler kibitzed about what to do, with a determination to accept a 55-45 split. During the interim, an interesting omen appeared in Time Warner’s own flagship magazine. Time editor Walter Isaacson chose Amazon’s Jeff Bezos as the magazine’s Man of the Year, although Steve Case had also been considered. On the cover, Bezos posed with a box on his head: The joyous face of a company that was changing the world.

  Soon Levin would do him one better.

  The Price of Eggs

  While AOL waited impatiently, Levin recused himself to ponder the deal over the holidays at his compound in Vermont. Though he would later insist that others were involved, this kind of solitary contemplation was typical for Levin, who had never been an opinion seeker. It is clear that Levin had been the prime mover and visionary of the deal. After it was done, some would complain about the hubris of Levin in doing a deal almost alone, without a healthy debate among stronger-minded executives who might present a serious challenge to it. Bressler, though competent, was junior, and Parsons had never been one to forcefully oppose anything Levin wanted to do. “He built this little children’s crusade around him,” said one Time Warner executive later. “He made it so there would be no dissent.”

  It is astonishing that Levin operated so independently, able to change the fortunes of such a major company in such secrecy, which one former Time Warner executive called “Nixonian.” This would be critical to striking the deal and also to its failure. Given that Levin had dubious control over the operations of the company, where true power had long resided in the divisions, leaving out more powerful voices like HBO’s up-and-comer Jeff Bewkes or Time Inc.’s legendary Don Logan was a major error. “Jerry was convinced that he had the right strategy, it would work,” said one executive close to him. “But he wanted to be able to say once again, ‘I am right against all protests of the company.’ ” In truth, as many executives close to him told me, Levin’s style was not collaborative. “Jerry is a guy who collects facts and data . . . and then goes off alone and contemplates,” said one Time Warner executive.

  Levin told me that he worried about leaks from his very leaky company that might start a groundswell against what he considered a revolutionary idea. He was not alone. One Time Warner executive said widespread consultation would have resulted in the deal being “a dead fish in the water.” And Levin wanted no obstacles and created a situation where he got none. He would, though, display an almost snotty disdain for those who did not agree with him, noting they were not big enough thinkers to comprehend yet what he had done. So while many later would accuse Case of snookering Levin, some going as far as calling Levin a moron, it was clear it was a con that the victim was very much in on.

  When he got back to the office after the New Year, Levin decided AOL was the right choice, and told Bressler to set up one more dinner meeting with Case to see if they could iron out everything. They decided to keep it small and intimate: Just Levin, Bressler, Case, and Novack. It was to take place at Case’s faux French chateau mansionette in suburban northern Virginia. There, the foursome would hammer out the deal over dinner, well into the evening on January 6, 2000. Gilburne and Kelly, who were at an investment conference in Arizona, coached Case by phone before the meeting, telling him to be as amenable and flexible as possible to Levin.

  He was. And so the terms, which the two sides had been working on, fell into place rather quickly. It would be a tax-free merger using purchase accounting. The ratio was fixed at 1.5 AOL shares to each Time Warner share, which added up to a price of $110.63 for each Time Warner share—an amazing 71 percent premium from Time Warner’s close of $64.75 on the Friday before the deal was announced. Under the agreement, AOL got 56 percent of the company, with Time Warner’s stake pegged at 44 percent. Even still, the group agreed, it would be considered a merger of equals, since the board of 16 members would consist of eight members from each side.

  The issue that caused the least tension was the one that would later become most controversial: The lack of a “collar” on the deal. A collar is a deal point that allows for a readjustment of the terms, should the stock of the seller or buyer fall below a preset range. As I would write later, “for better or worse, AOL and TW were tethered together for the storm,” because of the lack of a collar. Most acquisitions do have a collar, mostly to protect the acquired company from a price drop. And although Bressler had pushed for one, Levin demurred. Not only did Levin think it was unnecessary, but he also believed the lack of one would be a strong signal to Wall Street that the deal was going forward without any doubt. The huge 71 percent premium was supposed to protect Time Warner from any precipitous decline in AOL stock, and was too high a price for Time Warner to demand a collar too.

  Time Warner’s investment banker Joseph Perella of Morgan Stanley thought the no-collar provision made sense at the time, when it was not altogether clear that Internet stocks were about to fall. “When you replay the tape and remember the frenzy of opposition to this deal and the feeling that the company would be a giant, a collar would have been insane,” he noted to me in 2003. “The bust was a slow leak and if the boom had continued into 2001, we would have gotten squashed for not seeing the upside of such a hot stock. No one knew what was going to happen then, but today everyone has perfect vision.”

  Levin agreed. “We were getting married or not,” he told me in 2003, despite the raft of criticism he would get over the no-collar deal point. “If we had one, it would have said that we did not believe in our vision.” And Levin was most definitely a believer. It would be impossible, in short, to break up this deal without a lot of pain. But pain was not on Levin’s agenda, and he even happily agreed to several other seeming concessions.
The new company would have joint headquarters, in Dulles and New York. The ticker symbol would be AOL. And the name would be AOL Time Warner. “I picked the name,” Levin noted.

  Gilburne and Kelly were anxious as they jetted across the country from their conference in Arizona to get back to northern Virginia before the dinner’s end. As the private plane headed east, Gilburne and AOL investor relations head Richard Hanlon reminisced about how far AOL had come. Kelly said he was rendered almost mute at the very thought of it.

  After they landed, Gilburne caught a ride home with Kelly, since they lived near each other in Potomac, Maryland, not far from Case’s Virginia home. During the drive, they called Case and asked how it was going. “Okay,” he replied. They asked if they should come by or not. “No,” said the terse but excited Case, “I don’t want to change the dynamic.” So they went home separately and got online. Case IM’ed them soon enough. He simply typed: “It’s done.”

  The next morning, a Friday, things were jumping at AOL headquarters. They would need to close the deal immediately over the weekend due to the extreme possibility of leaks now that a wider group at both companies was due to find out. A group of about 40 AOL staffers gathered in the Malibu conference room on the fifth floor of AOL headquarters to be split up and sent to do various due diligence investigations in Virginia and New York. AOL and Time Warner afforded themselves only a few days of due diligence, since both were public companies, despite the fact that the deal would be one of the biggest in history.

  David Colburn started screaming to those gathered in mock horror about what lay ahead: “Do you know how much work this is going to take?!?” he barked. Colburn, like Pittman and his staff, hadn’t been much involved in the merger attempt, and had assumed the “eggheads” couldn’t get such a monumental deal done.

  But they had done it—and now they had to quickly put another deal on ice. By coincidence, eBay’s Meg Whitman, her top execu-tives, and eBay’s investment bankers from Goldman Sachs had come to AOL headquarters that day for what had been billed as a final negotiating session for the acquisition deal. But top AOL executives wandered in and out of the long meeting, shuttling between the company’s main boardroom (where the eBay executives sat) and the Malibu room on the opposite end of the floor (where the Time Warner deal team was working). It was a comical scene: Executives shuffled in and out, alternately apologizing to and ignoring Whitman and her team.

  The eBay group had no idea what was going on down the hall, and some wondered whether AOL’s culture had bred attention deficit disorder. They worried that perhaps AOL thought of eBay as a very small company and thought they might be seeing a high-level version of the classic AOL ad deal brush-off tactic. At the end of the day, quite unsatisfied, Whitman and others from the group went to Bob Pittman’s office to say good-bye. “You have a lot going on here, it seems,” she said, according to those there. She had no idea.

  The due diligence in New York was tense, as Time Warner and AOL tangled with each other under heavy pressure to get the deal to their respective boards, and iron out remaining issues. Both boards had been largely in the dark about the specifics of the deal until it was being shoved across the table at them on Sunday, January 9. Among the documents given to AOL board members were impressive charts showing how big the merger was going to be. “A Media Powerhouse for the New Millennium,” one was grandly titled, and the page noted that AOL Time Warner would become the world’s first truly “new media” company.

  The documents for both boards promised both grand new revenue and cost synergies: More cable services, more digital distribution, new interactive properties, common customer database, lower infrastructure, lower overhead, lower sales and marketing, lower ad sales, and a consolidation of interactive efforts. And other intracompany synergies were also touted: CNN distributed on AOL; Moviefone promoting Warner Bros.; Time Inc. magazine subscriptions sold online. In one line of the AOL board documents lay the first recognition of problems that might slow down these important synergies. There was a risk, the papers noted, that there might not be an “ability to achieve synergies in a decentralized corporate environment.”

  At a marathon nine-hour Time Warner board meeting at the law offices of its counsel Cravath, Swaine & Moore, there were achingly long banker presentations by the Morgan Stanley team, led by its investment banking head Joe Perella, and from other advisers. Morgan Stanley Internet analyst Mary Meeker, a longtime AOL fan, noted that there was no sign of weakness in AOL’s business, as long as it moved quickly to embrace the broadband business and the ad market stayed strong. By coincidence, Meeker had compared Steve Case to Time founder Henry Luce in an earlier Internet report she had written.

  Levin talked about the profound implications of the deal. Parsons talked about the people and warned the board, quite correctly, to expect some fallout from Time Warner employees. He warned the group that nothing was going to be the same again, and that this deal was unlike any before it. “This will be dramatic,” Parsons said.

  Turner was feeling a little grumpy about the price, given that AOL represented only 18 percent of the revenues and yet was getting more than half the combined company. But he noted happily that it would be nice to let AOL fix all the Internet woes Time Warner had suffered. Those present at the meeting said the docile board was largely complimentary to Levin for the deal and offered no objections.

  “At the time of the meeting, I don’t think that any CEO in America had more credibility than Jerry,” recalled Morgan Stanley’s Perella, noting that Levin had gone against conventional wisdom and bet on cable with a successful outcome. “He had been consistently right for too long in his vision, so he had a lot of support when he went in with this deal.”

  One board member, opera diva Beverly Sills, did admit to being a little confused by what was happening. Sills would soon be retiring from the Time Warner board, and she found all this talk of Web valuations and digital convergence incomprehensible. And the idea that a company not even out of its adolescence could purchase a major chunk of a company that had been around since before most people in the room had been born was mind-boggling to her. Sills was shaken upon learning that the old TWX ticker symbol would disappear to be replaced by AOL. “I have to get off this board, because I don’t understand a lot of this stuff about the future,” she said. “It’s just over my head. . . . I have outlived my usefulness.”

  Over at the AOL meeting, held at the Manhattan law offices of Simpson Thacher & Bartlett (coincidentally, the firm Levin had worked for early in his career), there was similar bonhomie and no objections. Briefed by Salomon bankers and its analyst Lanny Baker, it was a slam-dunk from the start. Most questions were trivial, such as board member Al Haig’s query about what would happen to everyone’s stock options. Only Fannie Mae head Franklin Raines raised a legitimate concern about the 71 percent premium, noting that at some point it might look as if AOL was selling the company at a discount. Netscape’s Jim Barksdale, famous for his down-home aphorisms, assuaged Raines’s worry. “That’s the price of eggs,” he said simply. “And that’s what we have to pay if we want Time Warner.” What he meant was that it did not matter what anything was worth anymore, but what the market would bear. The group waited until Levin called to tell them that the Time Warner board had approved the deal, and then voted for it, also unanimously.

  AOL and Time Warner had leapt into uncharted territory. When I finally got the AOL executive’s Instant Message confirmation in the dead of that Monday morning, the first email I sent was to Jerry Yang of Yahoo, to ask him what he thought. I knew he’d be up and online, like so many techies, and he’d learn of the deal pretty quickly from the Wall Street Journal’s Web posting, if he had not suspected it long before. And after everyone digested the news, I knew that they’d surely want to know what Yang’s highflying and stock-rich company would be doing; it would be the obvious follow-up story. After all, on the Friday before the merger, Yahoo itself was worth $150 billion.

  Yang soon called me
on my cell phone, and as I stood talking to him out in the cold San Francisco night on my porch deck, the fog drifting around me, it felt as if I was standing at the end of the earth. Adrenaline had taken over me by now; I quickly asked Yang a raft of questions and furiously took notes. I also couldn’t help myself: “People are taking Weimar Republic money, so what are you going to do?” I said, comparing Internet stocks to the highly elevated but ultimately worthless currency in pre–World War II Germany. It wasn’t a perfect metaphor, and Yang seemed confused. “It means you better buy things fast,” I explained, because over AOL’s rocky life Steve Case had seemed to have an almost psychic ability to know when to bail out. Clearly, if Case was discounting his stock, it might be time for Yahoo and others like it to act.

  Yang was unusually calm, talking about how Yahoo would remain neutral like “Switzerland” and the AOL Time Warner deal would make Yahoo an obvious choice for all the other now surely terrified media companies, like Disney and Viacom. Yahoo would stand pat, he said. While Yang might wonder if his company was wrong not to pursue a big media merger, he also was not certain what it had missed. But, he agreed, the merger was a game changer that would have an enormous impact on the media and Internet markets. But neither he nor I, to tell the truth, knew much more, since the proposed merger of AOL and Time Warner had upended everything we understood.

  Was this the moment when the Web would finally take over the world, a powerful movement that had been building for years now without a pause? It certainly felt like it. Or, I wondered for a brief second, as I stood shivering in the chilly air, was it actually the onset of snow flurries of that dreaded Internet nuclear winter?