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Dick Parsons Picks His Battles

This column was originally published on RealMoney on Sept. 20 at 10:52 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Dick Parsons has had a tough go of it at Time Warner (TWX - Get Report). When he took over as CEO of the company in late 2002, after Jerry Levin left, he had a lot of difficulties to deal with.

The AOL subsidiary was not only stagnating, it was a disaster. The situation ultimately led to a $100 billion writeoff and Securities and Exchange Commission investigations. This raises the one mark you could put against Parsons: He was president of Time Warner when the merger with AOL was announced.

The music business was also in trouble, at least in part because of the rise in P2P networks such as Napster, which enabled potential customers to download and swap music files for free.

The ongoing integration between disparate corporate cultures was not going well. Steve Case on the AOL side, Ted Turner from the Turner side and the various fiefdoms within the Time Warner universe were taking up political energy and preventing Parsons from getting to the task at hand.

Oh yeah, on top of that there was the $27 billion in net debt, preventing the company from taking initiatives such as a share buyback that might be used to boost shareholder value.

Choosing Battles

A company like Time Warner has three audiences: the customers, the shareholders and the debtholders. In a recent discussion, another TheStreet.com contributor said to me that he thought Dick Parsons was not effective as a CEO because shareholder price has not risen.

I strongly disagree with this. I believe Parsons decided to deal with the debtholders first because he felt that was the most immediately critical audience. For three years he was immensely effective in how he dealt with the needs of the debtholders.

What did he do? Let's count the ways:
    1. He immediately restructured Time Warner Entertainment. This was the complicated financial structure created by Jerry Levin in the 1990s. It shared the most valuable media properties in the Time Warner umbrella with partners such as Comcast, AT&T and Toshiba. Parsons bought back the properties and placed them back within the Time Warner umbrella.
    2. He streamlined management. The glamour execs of the 1990s -- Chairman Steve Case and Vice Chairman Ted Turner -- left the company. Parsons became chairman and also installed highly capable executives Don Logan from the publishing side and Jeff Bewkes from the HBO side to be his joint No. 2 and run the company together.
    3. He cut debt by $8 billion in the past three years and net debt (debt minus cash) by $13 billion. Long-term debt on the books right now is $19 billion, and cash is $6 billion, up from $700 million at the end of 2001. Debt was Time Warner's biggest issue a few years ago, and when the stock was down to the single digits in 2002, investors were even afraid of a possible bankruptcy. Now, investors such as Carl Icahn are suggesting that Time Warner tack on more debt in order to focus on shareholder-driven initiatives.
    4. As part of the debt-reduction plan, Parsons has streamlined or sold off assets in every division in the company, including the sale of its 50% stake in Comedy Central for $1.2 billion to Viacom; the sale of Warner Music Group to a private investor group led by Edgar Bronfman; the sale of the CD and DVD manufacturing group to Cinram; the rationalization of the cable business by jointly buying Adelphia's assets with Comcast and now planning a spinoff of Time Warner Cable to the public. Plus the company settled the patent litigation suit by AOL with Microsoft and pocketed $750 million. And it settled with the SEC all the investigations regarding AOL.

Shareholders' Turn

Now, with his attention turning toward the shareholders, I believe Parsons is going to deliver similar results. Already he has made shareholder initiatives, including a $5 billion buyback (Icahn is pushing for a $20 billion buyback, which is not impossible in the future), and he has instated a dividend for the first time since the merger with AOL.

Since Icahn has started his activist play for Time Warner, he has accumulated 2.6% of the stock and enlisted the help of other hedge funds such as SAC Capital and Jana Partner. Plus, he has met with Icahn and begun a dialogue. The next step is when Parsons speaks at this week's Goldman Sachs investors conference, outlining his plans for the company.

My guess is that Parsons' goals are not terribly different from those of the activists. If he figures out AOL , begins the $5 billion buyback, maybe raises the dividend and gives up more than 16% of Time Warner Cable (or at least outlines a schedule for doing so), then I'd guess that the stock will go up and the activists will be satisfied. I continue to reiterate my belief that Time Warner stock is heading to the $25-$30 range with minimal downside.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett . At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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