There Must Be a Pony in Here Somewhere

by Kara Swisher

  Although the indignity of being bought by AOL would later have a profound impact on the failure of the merger, more damaging at the start was Levin’s lack of communication to his major division heads about the deal. Time Inc.’s Don Logan, HBO’s Jeff Bewkes, and most others didn’t hear about it until the weekend before the announcement, leaving them little time to object, ask questions, or provide any input. Logan contemplated trying to get out of his contract, as did others, over the sudden shift in the company’s fortunes without any consultation. According to those close to him, he also thought the Internet valuations were “bullshit,” and ripe for a fall. Most of all, Logan could not believe Levin had done this without a word to him and others.

  This was classic Levin, of course, a way to avoid the possibility of any opposition before the deal was done. “He brooked no real objections, since he looked at anyone without vision as pygmies,” said one top executive, who was appalled, like most, to find out about the deal in a phone call from Levin after it was already struck. “And, anyway, how can you step up and say no in the maelstrom of all that excitement?”

  You couldn’t, and they didn’t.

  Synergy or Bust?

  One of the top corporate goals was to keep up the deal’s momentum in its first weeks, which meant selling it as hard as possible from the outset. But convincing others of the soundness of what clearly seemed an unproven idea and a gamble was not going to be easy, since there was no model for what Case and Levin had created and its success was based mostly on unknown trends far in the future. And ultimate success was predicated on visions of a high-speed digital culture, where AOL Time Warner could and would dominate with its potent mix of assets.

  Almost immediately, the companies started selling the sizzle, flacking a bunch of airy synergistic initiatives cooked up by Colburn’s team. But this was nothing compared to the most extravagant promise, which was trotted out to universal gasps: A vow to deliver spectacular financial results that would be hard to pull off even under the best of conditions.

  “We can’t show any weakness,” Pittman told his fellow executives, and Case, Levin, and Kelly shared that sentiment. They were hell-bent on providing instant proof of the deal’s worth through spectacular returns, and the figures they predicted were accordingly stunning.

  Initially, according to internal documents, Miles Gilburne’s team pegged $800 million as the amount of cash flow improvement the two companies could achieve in their first year as a merged company. Developed from an unproven wish list of ambitious cost-cutting and revenue-enhancing strategies, that was the figure the executives used to help convince the board to approve the merger. But even $800 million wasn’t considered an excessively ambitious estimate. Kelly, supported by Pittman and Case, soon bumped the figure up to $1 billion, giving it to Levin to present what one AOL deal maker called an “optically attractive” number.

  Levin told me he was surprised by the figure, which was arrived at with minimal analysis and no Time Warner input, but he accepted and later embraced it as a reasonable goal. “Everyone thought that by running the business tight, the money was attainable,” said Levin, noting that top executives at both companies felt it would be easy to find this many cuts in $30 billion of expenses. In addition, they considered the looming prospect of finding $1 billion in savings as a good tool to force collaboration among divisions in order to save money.

  But others within Time Warner didn’t think these numbers were realistic, or even real, and they believed that Levin wasn’t close enough to the operating units to understand what kinds of potentially damaging sacrifices he was asking of them. On the morning the deal was announced, Time Warner’s longtime investor relations head Joan Sumner (who later went by the last name Nicolais), whose tough reputation was well known on Wall Street, questioned Kelly directly about the $1 billion number.

  During the due diligence phase, she’d already had one run-in with the burly AOL CFO, a clash over who should be running a finance meeting. Undeterred, Nicolais now pressed Kelly hard on where AOL had come up with its financials. “Where did you get the one-billion-dollar figure?” she asked, wondering how Kelly could give out the data without Time Warner approval. “I’ve looked at the numbers, and I don’t see where you find one billion.”

  “You don’t know where,” he said dismissively. “But I do.” And Kelly would make certain he did know, by applying the kind of pressure to Time Warner divisions that they’d never experienced before. Kelly was convinced that Time Warner’s history of not making its numbers resulted from weak central control, so he put on his tough-guy persona—a tactic that had worked well at AOL. “No one can grind like me,” he’d brag to anyone within hearing distance, a rough style encouraged by Levin.

  Later, in an interview with me in 2003, Kelly would curiously deny ever making that particular remark—despite the fact that I told him at least a dozen people at both AOL and Time Warner had heard him utter the phrase in a variety of meetings. He did allow, though, that he believed it was critical to be firm right from the moment of the deal’s announcement. “Part of it was pushing the organization to take the costs out, because if we pulled back, we stalled,” he told me. “We had had a strong year and there was a strong wind at our backs, so we felt there was nothing we could not overcome.”

  Along with the $1 billion in savings, AOL and Time Warner trumpeted a range of other big numbers. Claiming their combined first year’s cash flow would hit $11 billion, Levin said the merged company was capable of smoothly riding out any economic storm and would post $40 billion in revenues. That amazing 30 percent growth rate, Steve Case later noted in a conference call with investors and analysts, was actually only a middle ground between his company’s 50 percent growth rate and Time Warner’s 15 percent one. But it would mean the company would have to reach unheard-of revenue and profit goals as time went on. To get there, all of top management would trumpet one more lofty number for AOL Time Warner: Its 130 million paying subscribers across offline and online distribution platforms. Pittman would later tout AOL Time Warner’s future ability to garner hundreds of dollars from each and every one of those consumers by leveraging its array of soon-to-be interlocking cable, magazine, online, and music subscription businesses. This was all—and I am being kind—a big guess.

  But to explain how all this might occur, since none of these services actually existed, the companies started spewing out press releases about new deals and partnerships that were designed to underscore the merged company’s potential power. Many people at Time Warner considered these mostly hype, blaming AOL’s Kenny Lerer, who thought it important to keep up the momentum through good news about the merger even before it was a done deal. A struggle over how to position the company in the public eye soon became acrimonious, with the Time Warner side urging less grand publicity, while the AOL side insisted on touting every single item it could get to prove the merger’s worth.

  This communications fight—in which Time Warner’s Ed Adler, a 20-year public relations veteran, was placed under Lerer’s command—centered on how to handle the press and position the combined company, and was another signal of the very different philosophies at work. In my experience, AOL under Lerer was all about control and fending off the press, while keeping on message constantly and loudly. It always reminded me a lot of campaign-style political spin, with highflying but sometimes empty promises. Adler represented a much less heavy-handed approach, which AOLers found lacked strategic thought. But being less meddlesome and cozier with the press worked much better within a media company located in New York, where Adler would have gotten quickly flamed by Time Warner’s legions of journalists for more aggressive methods.

  There were other differences in AOL and Time Warner public relations philosophies. While AOL had tamped down leaks almost viciously, this was never Time Warner’s practice. And while the Time Warner corporate often badly underplayed its announcements—the entertainment divisions providing the most hype—AOL never met a press release it did n
ot trumpet extravagantly. It is often said that whoever controls communications, controls all. And the battle for that function was perhaps one of the more obvious signs of trouble right away, since it set the tone for credibility of the whole merger. Once again, it angered many at Time Warner, especially as Levin began to become close to Lerer.

  “Our credibility took a big hit,” said one Time Warner executive. “Journalists, investors, and employees all felt betrayed; over time no one trusted us.” But AOLers thought Time Warner’s complaining was overdone.

  Guess which side won? Thus, the “good” news came fast and furious. February 15: “AOL and Time Warner Team Up for Winter Goodwill Games Promotion.” February 16: “America Online and Time Warner Announce Online Unveiling of the 2000 Sports Illustrated Swimsuit Issue Cover on AOL.” March 20: “Warner Bros. Records and AOL’s Spinner.com Present Faith Hill Live Online!”

  Still, some were not convinced of the benefits quite yet. Longtime AOL observer Allan Sloan, in a typically excellent Newsweek column, wrote, “The more high-flown the rhetoric surrounding a deal, the more suspicious we should be.” And Fortune’s talented Carol Loomis opined ominously in February 2000 in the Time Warner–owned magazine, “Regardless of what numbers may dazzle you about the deal, that is the one to focus on: The market cap that the company must push up a steep hill to continue rewarding investors.”

  Mickey Mousing Around

  While most were initially convinced of the merger’s promise, Case, Levin, Pittman, and others had to make sure the doom-and-gloom attitude of the unconvinced didn’t become pervasive. They hoped to solve that by getting the merger going as soon as possible, even before the deal was done. The companies aimed for a quick close of the deal by October, after approval from the Federal Trade Commission (FTC), the Federal Communications Commission (FCC), and the European Union. Many agreed the time it took to close the deal hurt the momentum of the merger, since it allowed too much uncertainty to linger for too long.

  Not surprisingly, considering the deal’s size, government regulators started asking questions, prodded by competitors who were eager to slow down the merger’s pace for both tactical and strategic advantage. Would a combined AOL Time Warner simply be too powerful? Was there danger that this new behemoth could squeeze out other companies in the online services, cable, and entertainment sectors? Could any other combination of companies achieve the same scale as AOL Time Warner? And, if not, who could control this giant?

  AOL and Time Warner tried to assuage growing fears by asserting that the two companies were in different businesses and didn’t confer on each other a stronger advantage in controlling any one arena. Generally, it was “apples and apples” mergers, such as two huge telecom companies combining, that aroused the interest of federal regulators, as these were the kinds of deals that could lead to total domination of a single industry. But the AOL Time Warner deal—involving magazines, television, movies, music, sports teams, and online services—was positioned by Case and Levin as a clearly apples-and-oranges union.

  But on May 1, that argument was destroyed by what normally would have been a simple business dispute. As happens often in the fractious cable industry, Time Warner and Disney got into a fight over the price of carrying some Disney-produced cable stations. In the heat of the moment, claiming that its license to carry Disney’s ABC station had expired before a new contract on all its cable properties could be settled on, Time Warner suddenly pulled the plug on the broadcast network in seven markets—leaving 3.5 million viewers in places like New York, Los Angeles, and Houston without ABC.

  Instead of seeing host Regis Philbin quiz talk show queen Rosie O’Donnell on a celebrity episode of the then popular Who Wants to Be a Millionaire?, viewers that night instead saw a screen with the words “Disney has taken ABC away from you.” Furious at the blackout, Disney appealed immediately to the FCC for help. Within 39 hours, ABC was back on the air, and shortly thereafter the FCC’s Cable Bureau rebuked Time Warner for its action. FCC Chairman William Kennard chastised the company, saying it “committed a clear violation of FCC rules” and that “no company should use consumers as pawns in a private contract dispute.” He stopped just short of accusing Time Warner of monopolistic practices.

  Not so New York Mayor Rudy Giuliani, who went even further, charging in the New York Times: “This is an example of what happens when you let a monopoly get too big.” Indeed, Disney lobbyists quickly began throwing around the term arrogant monopolist as they used the opportunity to push regulators to take a harder look at the merger. Among Disney’s more draconian recommendations was that the government split AOL Time Warner into two pieces, separating conduit from content.

  The Disney blackout was a cloddish move on the part of Levin and his often obstreperous cable unit head, Joe Collins, who were either oblivious to or, worse, ignored the damaging perceptions that the move might evoke in the middle of the merger approval process. AOL executives, particularly Steve Case, were livid, especially since they hadn’t been fully informed of the blackout plans.

  This distracting external fight would soon be eclipsed by the first round of internal strife, which resulted from a series of announcements on May 4 outlining the structure of the company after the deal closed. Designed to give Wall Street and the companies’ employees clarity about the setup, it painted a new media order that was an audacious shift for Time Warner. Early encounters between the compa-nies were rocky, with AOL already exhibiting aggressiveness and Time Warner stubbornness. So when the new management was announced, it gave credence to the worry that AOL had taken over.

  As expected, Steve Case was named chairman, Jerry Levin chief executive officer, and Mike Kelly chief financial officer. Levin, in a move that angered many, had earlier picked Kelly, who would report directly to the CEO, dumping Time Warner CFO Joe Ripp. Levin also presided over the decision to create an unusual power-sharing arrangement between Bob Pittman and Richard Parsons, who were named the cochief operating officers. Although he later said he hadn’t intended for it to seem that way, Levin had created a division of labor between them that seemed to indicate that Pittman was the heir apparent.

  Pittman would oversee the supposed future growth engines of the business going forward—the key subscription, distribution, advertising, and commerce businesses: AOL, Time Warner Cable, Time Inc., HBO, TBS, and the WB television network. Left to Parsons was the softer side, including the entertainment contingent: Warner Bros., New Line Cinema and Warner Music, Time Warner Trade Publishing, and the legal and human resources departments. The balance was skewed enough that one AOL executive actually resorted to an appalling racist quip, which later got wide circulation internally, describing the African American Parsons’s position as “separate but equal.”

  Although Pittman hadn’t played a key role in creating the merger and actually had mixed feelings about it, he was still the only executive with significant experience in both companies. Glib and charismatic, he was also seen by Wall Street as the consummate schmoozer and salesman. Parsons, considered more of a diplomat and a gentleman, not only lacked Internet DNA, he was just a bit dull compared to his ambitious cohort.

  Besides, it wasn’t even clear whether Parsons was in Time Warner for the long haul. He’d been at the company for only five years, and before that, he’d worked in banking, law, and government service, including a stint as a senior aide to President Gerald Ford. For Parsons, Time Warner could well be just another notch on an impressively eclectic résumé—rumors abounded that he was likely to get a job in the Republican administration if George W. Bush won the presidential election in the fall. For Pittman, on the other hand, a march to the pinnacle of AOL Time Warner would be the ultimate achievement—the culmination of a career spent climbing the ladders of both old and new media. While Pittman would tell people close to him as the merger progressed that he had no interest in the top spot, it seemed as if it was his job to lose.

  As was his manner, Parsons remained quiet about the implications of
his new role. But many inside Time Warner were furious, since most of their team had suddenly been blasted out of the corporate center. The new job designations made it clear that AOL was firmly in charge—especially since its executives also took over lobbying (George Vradenburg over Tim Boggs), communications (Kenny Lerer over Ed Adler), and investor relations (Richard Hanlon over Joan Sumner Nicolais). Levin appeared to have given up everything to get the deal done, in what many inside the company regarded as an almost traitorous act. “It was the first real sign that Jerry was protecting his own job and sold everyone out,” said one executive who lost a position to an AOL counterpart. “He likes transforming transactions in which he is the only survivor.”

  Joe Ripp, who had lost his financial job to Mike Kelly, appealed to Levin to not let AOL get all the key corporate jobs. “Jerry thought he would be running it, and I told him, ‘No, you won’t, they’re street fighters and you’re not,’ ” he recalled. “I said, ‘You don’t have a prayer. You have given it all up, you’re sandwiched in, you will lose control.’ ” Many others both inside and outside of Time Warner made similar appeals to Levin. They all fell on deaf ears. AOLers, meanwhile, hardly noticed their growing anger.

  Neither, it seems, did Levin. In 2003, after his ouster, Levin said he didn’t think he’d made bad decisions in the senior job appointments, adding that in most cases the AOL person he picked was more qualified than the equivalent Time Warner employee. In addition, most of the operating divisions still had Time Warner executives at the helm. “By combining it all, I thought over time something new would emerge,” he said. “We needed change.” But, clearly, Levin hadn’t thought through the implications of his choices and was amazingly insensitive to the kind of rage they would cause at Time Warner. Indeed, it was probably this one move that set in motion the intransigence from the Time Warner troops toward their AOL leaders.