AOL Clouds Icahn Battle

With Carl Icahn turning up the pressure on Time Warner's (TWX) bosses, the AOL division looms as a bigger question mark than ever.

Icahn has said repeatedly in recent weeks that he wants the New York media titan to wake up its long-slumbering stock with shareholder-friendly moves like massive stock buybacks and a cable spinoff. Though Icahn has indicated he isn't purely unhappy with management, it's clear that he wants more out of the company than the legal settlements that have recently been trumpeted as a sort of progress.

Given the hideous performance of Time Warner stock since the AOL merger debacle, few observers have questioned the need for action. But CEO Dick Parsons has stopped far short of pointing toward the kind of sweeping gesture that Icahn and his allies want. And it could be that Parsons has been tight-lipped in part because he knows Time Warner needs to keep the cable systems to have any hope of reviving the flagging America Online business.

Time Warner's "conglomerate structure obfuscates value and complicates the investment thesis," Icahn has complained. In response, Icahn has advocated a complete spinoff of the company's cable operation as well as a stock buyback in the $20 billion range, which is four times as big as Time Warner has planned. In addition to making himself available for meetings, Icahn has recently indicated that he will seek a board seat in an effort to bend management's ear.

Considering the deep pockets of his group -- Jana Partners, Franklin Mutual and SAC Capital are in the process of acquiring 2.6% of Time Warner's stock -- that's no idle threat. But larger strategic issues may cloud the matter.

While it was AOL's hot performance throughout the 1990s that spurred the 2001 linkup with Time Warner, the online property has been a much less stellar performer since then. AOL has been losing subscribers, and with consumers moving en masse to broadband Internet connections from the dial-up service that was prevalent a decade ago, the business of competing with rivals ranging from Yahoo! (YHOO) and Google (GOOG) to Microsoft (MSFT) has only grown more pressing.