AOL Hangs In Despite Unsettling Jolt - TheStreet

Even as they confirmed a sweeping management shake-up, top officials of

AOL Time Warner

(AOL)

tried to pay homage to the two-year-old merger that created the mess they're in now.

Late Thursday, the media giant confirmed reports that have swirled all week that Robert W. Pittman, chief operating officer and director at AOL, will resign those positions. He will remain CEO, temporarily, of America Online, not the integrated company that was supposed to bridge the Old and New economies, but the Web portal division that is now one of the company's trouble spots.

"We have the best media, entertainment and communications businesses in the world," said Richard D. Parsons, CEO of the integrated company, AOL Time Warner. It was a nod to the 2000 merger that brought Time Warner's publishing, broadcasting, cable and music units under America Online. But he continued: "Our challenge --and our goal in making these changes -- is to take the lessons we've learned over the past two years and use them to make the parts work together to create greater value for our shareholders."

Indeed, it was the company's clearest acknowledgment that the two-year-old integration strategy, and the man who drove it, Pittman, now represent the past.

Rising in their place are two powerhouses of the old Time Warner. Don Logan, formerly chairman and CEO of Time Inc., becomes chairman of the new media and communications group. That will include America Online, Time Inc., Time Warner Cable, and AOL Time Warner Book Group and Interactive Video unit.

Jeff Bewkes, formerly chairman and CEO of HBO, is now chairman of the new entertainment and networks group, comprising HBO, New Line Cinema, The WB, Turner Networks, Warner Bros. and Warner Music.

Both Bewkes and Logan will report directly to Parsons.

These changes were widely anticipated. But even though AOL Time Warner shares have been on a downward spiral all year, they surrendered little ground Thursday as the speculation swirled. The stock closed Thursday at $12.45, down 5%.

That loss -- primarily driven by a

Washington Post

article suggesting improper accounting of advertising sales at the America Online unit -- may be a cruel blow to AOL Time Warner employees who had once hoped to fund a retirement with their company stock. But considering how other stocks have been demolished recently by articles alleging books-cooking -- think

Omnicom

(OMC) - Get Report

,

WorldCom

(WCOME)

and

Adelphia Communications

(ADELQ)

, for example -- the reaction in the market seems mild.

So perhaps the story is that people's worst suspicions about AOL were already in the stock. Certainly, the allegations in the

Post

are fascinating and lurid. And so is the gist of the story that ran in Tuesday's

Wall Street Journal

-- that the titan's oft-hyped strategy of selling advertising across its numerous media platforms has turned out to be an unworkable dud, and that Pittman was throwing up his hands rather than deal with the mess that was once a unique selling proposition of the America Online-Time Warner merger.

In Thursday's statement, Mr. Pittman put the best face on the news. "Having worked so hard to build the AOL service and brand, and after then going through the merger and the last 18 months, it's time to take a break. I'm proud of what we built at AOL and believe that it has a great future. Likewise, I have confidence in AOL Time Warner's prospects."

Almost everyone knew that the emperor had fewer clothes on than he purported to. Months ago, publications such as the

Journal

pointed out that several of AOL Time Warner's big media deals were with business partners of one sort or another, making it hard for outsiders to tell whether the deals were the result of AOL's much-vaunted cross-media strategy or just existing coziness. AOL Time Warner's stock has already been hit by worries of accounting impropriety, though not at its online unit; rather, Adelphia-inspired industrywide concerns hit its cable operations. AOL Time Warner, down 75% from its 52-week high, has lost nearly half of its value since the first disclosure of Adelphia's accounting and governance problems in March.

And although the news will likely be of interest to some fact-finding congressional committee, it's not a surprise to read in the

Post

that AOL Time Warner was brashly confident in public about the continuing dot-com boom at a time when its dot-com advertising clients were crashing and burning. This disconnect between AOL Time Warner's protestations of invincibility despite crippling business conditions was made apparent last year when the company finally admitted what Wall Street had already figured out: that the company's financial targets were hopelessly unrealistic.

AOL said in a statement that its accounting for the transactions it discussed with the

Post

was appropriate and in accordance with generally accepted accounting principles.