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AOL plan unravels troubled merger

By Sarah Rabil
Bloomberg News / May 29, 2009
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NEW YORK - Time Warner Inc. plans to spin off AOL this year, unraveling the biggest takeover in corporate history after the $124 billion combination triggered record losses and sank the company's stock price.

AOL's online advertising and Internet-access businesses will be separated into an independent, publicly traded company, New York-based Time Warner said yesterday.

The 2001 acquisition of Time Warner by Web pioneer AOL led to shareholder lawsuits and a regulatory investigation. AOL's subscriber numbers have since shrunk, and its ad sales have dropped as competitors such as Google Inc. have expanded, leaving the Internet unit worth a fraction of its original value.

"It's kind of a long overdue move that people wished would happen a long time ago when it was clear that these companies were not helping each other," said Gartner Inc. analyst Andrew Frank. The merger was "conceived in a closet of unreality."

Time Warner shares rose 55 cents to $23.55 yesterday on the New York Stock Exchange and have risen 5.6 percent this year.

Time Warner chief executive Jeffrey Bewkes, who took over last year, is getting rid of AOL to focus on the Warner Bros. film studio and TV businesses such as CNN, HBO, and TNT.

Time Warner wasn't able to sell or find a partner for AOL after talks with Google, Yahoo Inc., and Microsoft Corp.

The move gives AOL chief Tim Armstrong a public company to run after he joined from Google two months ago.

The unit will keep its AOL brand name because it is recognized internationally, Armstrong said, declining to provide specifics about his strategy.

When Google bought a 5 percent stake in AOL for $1 billion in 2005, it valued the unit at about $20 billion. Time Warner said last month it was in talks to buy back the stake. Google wrote down $726 million of the investment last year.

Time Warner's 95 percent stake in AOL is worth about $6.3 billion, including about $3.4 billion for the ad business and $2.8 billion for the access division, according to a report by David Joyce, an analyst with Miller Tabak & Co.

Michael Morris, an analyst with UBS AG, pegs AOL's total value at $5.5 billion, based on Google carrying its stake at $274 million.