New York Times
January 16, 2000

Price of Joining Old and New Was Core Issue in AOL Deal


Stephen M. Case, left, America Online chairman, and Gerald M. Levin, chairman of Time Warner, laid the groundwork for the two companies' deal. Ted Turner, right, Time Warner's vice chairman, supported it.

The journey to last week's announcement that America Online would buy Time Warner in history's largest merger began last fall and included secret meetings in New York and Boston and a key dinner on Jan. 6 at the home of Stephen M. Case, the chairman of America Online.

But the turning point for the deal came not at a dinner or a power breakfast, but over the New Year's holiday in the solitude of the small library of the Vermont vacation home of Gerald M. Levin, the chairman of Time Warner. It was there, where Mr. Levin says he does his best thinking, that the chairman of the world's largest media company finally decided he would accept less than half ownership of the combined company.

Time Warner, to be sure, would contribute about 80 percent of the revenues of the new company, thanks to the cash-producing might of a media empire that spans Time and Sports Illustrated, Warner Brothers and CNN. But it was America Online, with its Internet flash, that was the hot stock on Wall Street, and thus worth far more than Time Warner.

So Mr. Levin accepted that the price of leaping into the Internet era with America Online would be a high one. But there were limits, too. In Vermont, he came up with the make-or-break offer he would propose at dinner later that week at Mr. Case's home in suburban northern Virginia: Time Warner shareholders would agree to own only 45 percent of the new company, while America Online shareholders would get 55 percent.

"I decided then that if AOL would go along with that, we had a deal," Mr. Levin recalled last Friday. "If not, we were going to have to go our separate ways."

The story of how the America Online-Time Warner deal was put together is the step-by-step account of two major companies -- a front-runner in the New Economy and a leader of the Old Economy -- grappling with those issues of business strategy and pricing.

In industry after industry, executives are being forced to confront the same issue that Mr. Levin faced: At what pace and at what price to enter the Internet economy? And for their part, as the Internet moves into the mainstream, other Internet executives face the core issue that Mr. Case did in this deal: Does it make sense to buy into established industries even if it means slower growth and a lower stock price?

At times, America Online and Time Warner seemed far apart, almost to the point of parting ways. But "we kept on dribbling the ball, even when it seemed that there was no air in it," observed Kenneth Novack, America Online's chief negotiator on the deal.

Eventually, the executive teams of both companies decided that heading as one into uncharted territory was a gamble worth taking.

"If they are right," said James L. Barksdale, an America Online board member, "this could be an awesome company, and one that delivers long-term value for shareholders."

If they are right.

Mr. Case took the first step in October with a telephone call to Mr. Levin. The two men had spent time together the previous month at executive gatherings -- first the Global Business Dialogue on E-Commerce in Paris and then the Fortune Global Forum in Shanghai, sponsored by Time Warner.

What made Mr. Levin most interesting to Mr. Case was the strategic research that the senior management team had been conducting at America Online's headquarters in Dulles, Va.

With their company's stock price rising sharply last year, the America Online management team looked anew at the possibilities for those increasingly valuable shares -- a currency for forging alliances and making acquisitions.

According to one team member, they focused on three types of companies: cable television or telephone companies that might give America Online assured access to powerful, high-speed communications networks; Internet companies they might acquire; and media concerns that they might team up with or buy outright.

Time Warner loomed in two of those fields, as a huge media company and as the nation's second-largest cable network operator. And Mr. Case got along well with Mr. Levin in Paris and Shanghai. So he called Mr. Levin to describe a future in which the media and Internet seem increasingly likely to converge -- as the personal computer, the television and the telephone become parallel digital pathways to new types of information and entertainment services.

"My motivation is to position this company to capitalize on the era of convergence," Mr. Case explained in an interview. "Time Warner has powerful media brands, and I think people underestimate the power of established media brands and the customer relationships that those brands represent."

Mr. Case called Mr. Levin in October not simply to spin visions, but also to float a specific proposal. He said he was thinking of a 50-50 "merger of equals" in which Mr. Levin would be the chief executive officer, running the company, and Mr. Case would be chairman. Intrigued, Mr. Levin suggested that the two meet soon.

On Nov. 1, they dined at the Rihga Royal Hotel in Manhattan in a private room, "so no one would see us," Mr. Levin recalled. As they sat down, Mr. Levin told Mr. Case he did not want to discuss the subject of price just yet, but instead wanted to focus on what he called the "social issues" -- whether the two shared similar perspectives on management and whether Mr. Case understood the need to avoid allowing business considerations crimp the independence of Time Warner's thousands of magazine and broadcast journalists.

Both men came away from that dinner satisfied that they should take things to the next level.

And so a pair of skilled corporate sherpas -- one representing each side -- started gearing up for the climb to the summit.

For America Online, the key negotiator was Mr. Novack, the 58-year-old vice chairman, a Boston lawyer who for years has been a trusted elder adviser to Mr. Case, who is 41. On major matters, as one senior manager put it, "Ken Novack is the last guy Steve talks to before he pulls the trigger."

Time Warner's chief negotiator was Richard J. Bressler, 42, who joined the company in 1988 from Ernst & Young, where he had become one of the youngest partners in the history of the accounting and management consulting firm. He quickly rose up the ranks to become chief financial officer and, last summer, chairman of Time Warner Digital Media -- a priority for Mr. Levin, 60, who in a recent company memo described Mr. Bressler's mandate as the "digital makeover of all Time Warner."

At noon on Nov. 16, Mr. Novack and a colleague, Miles Gilburne, met with Mr. Bressler in his 28th-floor Rockefeller Center office, a view of ice-skaters in the rink below. They wanted to explore what new services might be feasible if the two companies merged.

They discussed how people receive information and entertainment, or "content," today (through magazines, television and Internet-connected PC's) and how they might receive it in a couple of years (digital cell phones, wireless hand-held devices).

Mr. Gilburne, a senior strategist at America Online, usually explains his ideas while scribbling on a huge whiteboard at his office in Virginia. Because Mr. Bressler's office had no such amenity, Mr. Gilburne asked for an easel with a large pad of paper attached. Soon sheets of Mr. Gilburne's diagrams and notes covered Mr. Bressler's gray walls.

When the three-hour meeting ended, Mr. Bressler recalled, "We walked out of there really juiced about what we could do."

But even as the business logic of a merger looked more and more appealing, the pricing issue was becoming increasingly difficult. That became apparent the next morning, Nov. 17, when Mr. Case and Mr. Levin met for breakfast at the St. Regis Hotel in Manhattan.

America Online's stock had been rising steeply. For Mr. Case, that made his original notion of a 50-50 ownership deal no longer practical. The currency of the deal, after all, was America Online stock. "I was prepared to pay a premium," Mr. Case recalled, "but there was only so far I could go."

By then, according to people close to the talks, Mr. Case was pushing for 60 percent to 65 percent ownership of the combined company. Although the two men decline to disclose what ownership percentages were discussed over breakfast, Mr. Levin recalled: "It was clear that we weren't together. I said, 'I don't see how we're going to bridge that gap.' "

Hoping to narrow the gap, the two sides held a pair of meetings in December, one in New York, the other in Boston, accompanied by senior investment bankers: Eduardo Mestre, a vice chairman of Salomon Smith Barney, representing America Online, and Paul Taubman, a managing director at Morgan Stanley Dean Witter, who helped advise Viacom on its merger with CBS, representing Time Warner.

The parties agreed that the companies would have the same number of directors on the board.

But the ownership ratio remained the big question.

Over the holidays, Mr. Levin and Mr. Bressler talked frequently by phone. Mr. Levin had decided the options were a merger with America Online or a primarily go-it-alone digital strategy for Time Warner.

"I had essentially eliminated in my mind any other merger," Mr. Levin recalled.

Returning from his New Year's holiday in Vermont, Mr. Levin instructed Mr. Bressler to call America Online and set up a meeting with Mr. Case. A dinner was arranged for the following evening at Mr. Case's house in McLean, Va.

On Jan. 6, Mr. Levin and Mr. Bressler, who had flown down from New York on a Time Warner corporate jet, arrived at Mr. Case's house at 6:30 p.m.

Mr. Levin noticed that two decorative Christmas reindeer on Mr. Case's lawn had fallen down. Perhaps an omen, Mr. Levin recalled thinking, that "we weren't going to do this deal."

Over wine in the living room, the four men talked about their companies, but other things as well, including sports and Time Warner's HBO hit series "The Sopranos," which Mr. Novack sheepishly confessed he had not seen. The discussion in the living room lasted "about a bottle and a half," or 90 minutes, before they began dinner, Mr. Novack recalled.

Finally, Mr. Levin steered the conversation to the one issue not yet discussed: ownership. He revealed that he was willing to settle for 45 percent ownership of the merged company for Time Warner shareholders. That would mean 1.5 shares in AOL Time Warner, as the merged company would be named, for each share of Time Warner stock -- but not a fraction less.

Mr. Case, who had long been pushing for a 60-40 split, called for a bottle of 1990 Château Léoville-Las-Cases from the wine cellar. The deal, in essence, was done.

Still, there was "no clinking of glasses or high fives," Mr. Novack recalled. When the chocolate mousse was cleared at midnight, both sides agreed to go off and sleep on their decision.

Back in New York the following morning, Mr. Levin said, "I got up and felt comfortable that it was the right thing to do."

He asked Mr. Bressler to call America Online. At 9:15 a.m., Mr. Bressler called Mr. Novack. "Is there anything that has changed since we talked last night?" Mr. Bressler asked.

"No," Mr. Novack replied. "Nothing at all."

AOL Time Warner Merger (2)