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Case quits but questions loom
AOL stock backs off high after Case says he'll give up top spot; focus turns to possible successor.
January 13, 2003: 2:47 PM EST
By Chris Isidore, CNN/Money Staff Writer

NEW YORK (CNN/Money) - AOL Time Warner stock rose Monday on news that the architect of the troubled merger that formed the company, Steve Case, will step down as chairman, but the gains in the share price were muted.

Case, who will stay on as a director and co-chairman of the board's strategy committee, said he could have remained as chairman but decided Friday evening that it was better for the company for him to leave rather than face more questions about his continued role at the world's biggest media company. His decision to leave was announced Sunday evening.

Asked Monday by CNN's Paula Zahn whether he jumped or was pushed, Case said "I jumped." He said only one investor and only one board member had suggested that he should give up his position, although he did not identify either individual.

"At the end of the day, as we approached the May shareholder meeting, I did think there was a possibility of more noise, and that would be a distraction," Case said on CNN's American Morning. "This company does not need any distraction. We have a lot of hard work to do."

Concedes merger results a disappointment

Case is widely proclaimed as a visionary who early on saw the potential for the growth of the Internet. In 1985 at the age of 26, he co-founded the company that eventually would become America Online, starting with about a dozen employees and a service for users of Commodore 64 computers. The World Wide Web and browsers that would fuel the growth of the Internet did not yet exist.

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Steve Case, chairman of AOL Time Warner, talks about his decision to step down from the top spot in May and the challenges facing AOL.

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Within 15 years, the company had grown so large that he engineered the purchase of media giant Time Warner Inc. in a deal seen as the triumph of new media over old media. But the combined company, which includes CNN/Money, Time magazine, Warner Bros., and other properties, has never lived up to expectations, and the stock has declined substantially since the merger.

Case conceded that the performance of AOL Time Warner and its stock have been a disappointment. "I was the architect of the merger. The company has not done well; it certainly has not done anything that anyone would have expected when we did the merger, so it's not at all surprising that the disappointment would be directed to me," he told CNN.

But Case said he remains convinced that the decision to combine the two companies was a good one that eventually will prove its worth. "The promise of the merger still burns bright in my head," he told CNNfn Monday.

AOL Time Warner (AOL: up $0.31 to $15.19, Research, Estimates) stock rose about 2 percent Monday afternoon after trading as much as 3.5 percent higher earlier in the day. But the shares tumbled by half last year and are off about 80 percent compared to AOL shares when the merger was announced, and some market veterans said the upside, at least for the time being, seems limited.

Major change not expected

Case's departure is the latest sign that the big media mergers of the late 1990s are not paying off for investors, after Jean-Marie Messier stepped down as chairman of Vivendi Universal and Thomas Middlehoff left the top spot at Bertelsmann.

Analysts and investors said Monday they did not see a significant change in the strategic direction of AOL Time Warner, even with Case's departure.

Jeffrey Logsdon, analyst with Gerard Klauer Mattison & Co., said he doubts the company will move to undo the merger and spin off America Online, the world's biggest Internet service provider, despite the unit's problems.

Steve Case will step down officially in May, according to an AOL Time Warner statement.

"Clearly there's been an undervaluing of the Time Warner assets. The question is how you unlock that value?" Logsdon said. "But I think there are a lot of tax considerations around a possible spinoff that has a lot of negative implications for the company."

Sanford Bernstein analyst Tom Wolzien said: "Case was clearly a target of shareholders concerned about what had happened to the stock price. But the Time Warner people, led by [CEO] Dick Parsons, had basically already taken over the company. So Case's role going forward had already been minimized."

Company officials repeatedly have denied any plans to spin off the America Online unit.

Problems linger for AOL

Plans for Case's departure come amid speculation that the company is close to writing down the value of its assets by billions due to the reduced value of America Online since the merger. The move would come after a record $54 billion charge a year ago and could cause further problems for its already strained balance sheet.

The company, which said in October it probably would take a "substantial" charge in the fourth quarter to reflect the reduced value of AOL, is to report financial results Jan. 29. Analysts expect it to report a fourth-quarter profit of 26 cents a share excluding special items, flat with a year earlier.

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The sharp drop in AOL stock has prompted criticism from many shareholders, including Ted Turner, vice chairman of the company and its largest individual shareholder, who has seen his personal fortune fall by billions with the decline in the stock.

Turner said in a statement, "I admire Steve Case's decision to put our company and its employees first, and I am delighted that he will remain on the board and be active because frankly, we really need his experience and vision."

The Wall Street Journal reported that Gordon Crawford, an executive at Capital Group, AOL's biggest institutional shareholder, had lobbied hard for Case's departure. Crawford was not available for comment Monday, and his office had no statement on Case's planned departure.

No successor for Case as chairman was announced nor was any timetable for a decision given. But the AOL Time Warner board has a host of candidates it could choose from.

Oakmark Funds portfolio manager Bill Nygren, a partner at Harris Associates, which holds about 40 million AOL Time Warner shares, said that he could support AOL Time Warner CEO Parsons taking the chairman role as well. But he added he's not overly concerned about who is named the next chairman.

"One of the odd things about covering AOL Time Warner as a portfolio manager [is] there seems to be much more interest in the personalities in the different positions at the company than in the value of the assets," he said.

Thinning AOL representation

Case's departure continues and in some ways completes the loss of influence of executives from the AOL side of the merger.

When Time Warner veteran Gerald Levin left his position as CEO of the combined company last year, he was succeeded by Parsons, another Time Warner veteran, not Bob Pittman, Case's former No. 2 at AOL who was also co-chief operating officer of the merged company.

Pittman left the company in July as two Time Warner veterans, Don Logan and Jeff Bewkes, assumed more power, with Logan getting ultimate responsibility for AOL. When the America Online unit named a new president in August, it was an outsider, Jonathan Miller, a veteran of USA Interactive, who was chosen for the job.

AOL has seen its key advertising and commerce revenue fall, along with its profits. Long-term ad deals signed before the bursting of the Internet bubble are expiring. And some of its 35 million customers are changing from its dial-up service to high-speed Internet connections with their cable or phone companies, or lower-cost dial-up service offers.

The last year also has raised questions about the accounting practices at AOL before the merger, which some critics suggest had improperly inflated its stock price. In October, the company restated past results, erasing $190 million in revenue and $97 million of operating income in the previous two years.

The Justice Department and Securities and Exchange Commission are still probing AOL's accounting, although company executives maintain there was no wrongdoing.

Case told CNN Monday that the investigation now is in the hands of government officials, CEO Parsons and Chief Financial Officer Wayne Pace. He said he always tried to make sure the company did the right thing and that he feels good about the way he conducted himself.  Top of page

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