Is It Safe? Time Warner Drops AOL to Grow

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Time Warner(TWX Quote) said last week it would spin off its struggling AOL division after years of poor performance. The move will allow both companies to focus on their core products, but will it be enough to return Time Warner to growth?

When AOL bought the much larger Time Warner in 2001, it seemed like a fundamental shift in the business landscape; an Internet pioneer was teaming with one of the most influential media companies in the world. AOL turned out to be a major money drain for Time Warner.

Bad acquisitions and customer defections to cable-controlled broadband technology hobbled AOL, taking Time Warner down with it. Once free of AOL's lifeless body, Time Warner should emerge leaner, with a more sensible approach to its operations. The company will finally be able to nurture products with better prospects.

As part of the divestiture, Time Warner plans to buy Google's(GOOG Quote) 5% stake in AOL. Time Warner shareholders will receive shares of the new AOL, cutting all ties with Time Warner. Investors should hold off on buying Time Warner stock until after the spinoff to avoid paying a premium for AOL shares.

It's quite a change for AOL, which seemed unstoppable in the late 1990s, when consumers relied on America Online to connect to the Web. After the dot-com bust in 2001, AOL's value crumbled, forcing the newly formed AOL Time Warner to take a $100 billion writedown in 2002. AOL hasn't been able to recapture the phenomenal performance that made it a household name.