by Kara Swisher
Merging with a media company had always been the real end game anyway—the path to convergence that Case had long dreamed of. He had discussed the concept a lot with his close friend and AOL board member Thomas Middelhoff of Germany’s Bertelsmann, but the cultural issues seemed too big and the family foundation-controlled company was not for sale. NBC was low on the list, because of the troubles the broadcast market was undergoing. No serious discussions were pursued with News Corp. or Viacom, although later Viacom head Sumner Redstone would try to burnish his reputation as a savvy mogul by recounting that he had turned AOL down flat.
Actually, it was not Redstone, but Disney’s Michael Eisner who’d done that. Gilburne had traveled to see his counterpart, Peter Murphy, at Disney’s California headquarters, to explore various possibilities of collaboration at very early stages. Eisner, according to sources, found out about the discussions and was furious, thinking the pair was discussing a merger behind his back. Apoplectic, he called senior Disney executive Sandy Litvak to get Case’s home number. Litvak called AOL’s Vradenburg, who finally gave it to him. Eisner then called Case at home and told him angrily to stay away, irked at the prospect that he could be acquired and nervous that AOL might attempt a hostile takeover. Sources familiar with the conversation said that Case tried to assure him that that wasn’t what he was attempting, and that AOL would do only a friendly deal with Disney. Or do none at all, given Eisner’s angry mood—which was how it turned out.
AOL executives didn’t care that much, really, because their first choice had always been Time Warner. Steve Case, who was trying to make contact with executives at all possible companies, was on the hunt and Jerry Levin was the prey. The pursuit of Time Warner would soon be dubbed “Project Tango,” one of several monikers Ken Novack drew from the military-style names for the letters of the alphabet. Walt Disney was “Whiskey,” News Corp. was “Foxtrot,” Viacom was “Victor/Charlie,” and Bertelsmann was “Bravo.” AOL was, not surprisingly, “Alpha.”
Time Warner had all the things AOL needed, according to internal documents—strategically, financially, and in many other ways. Among the key positives: Time Warner’s cable could solve AOL’s broadband problem; it had strong consumer brands; its management was top-notch; it had low-risk businesses; and it would also put AOL on a more level playing field in relation to Microsoft, giving it money and manpower, as well as a range of solid assets that would be hard for the software giant to match.
Last on AOL’s list was one perceived plus that would prove quite the opposite: “Good cultural fit.”
Let’s Blame the Commies
It certainly seemed the cultural fit might work from the beginning of the deal dance, which focused almost exclusively on the rapport between Case and Levin. Like many intense relationships, it would begin as a mutual seduction and end up turning into a mutual deception. Both men, profoundly awkward as communicators, would engineer the creation of what could be the most powerful media company ever.
While a lot of attention has been paid to the more glamorous late September 1999 meeting in China, Levin and Case had met many times on the executive circuit—at the whirlwind of investment conferences, industry alliance meetings, and political events that is part of being a CEO in American business.
They bumped into each other in a more substantive way in mid-September of 1999, at the first meeting of the Global Business Dialogue on Electronic Commerce at the Louvre museum in Paris. The initiative, chaired by Thomas Middelhoff, had been launched at the beginning of the year to focus on developing policy for the global online economy. At the meeting, Case and Levin were announced as cochairs for the following year, and they spent a lot of time there talking about the digital future. “I thought Steve was bright, young, determined,” recalled Levin. Case was equally impressed—since Levin spouted the same kind of digital hoo-ha that Case so adored. Had they each found a soul mate?
The pair next met up just a few weeks later in Shanghai, China, at the Fortune Global Forum being held on the 50th anniversary of the founding of the People’s Republic, sponsored by Time Warner’s magazine. Titled “China: The Next 50 Years,” the event boasted an impressive roster of business celebrities and global players, including former Treasury Secretary Robert Rubin, former Secretary of State Henry Kissinger, General Electric’s Jack Welch, Ford’s Jacques Nasser, Coke’s Doug Ivester, Pepsico’s Roger Enrico, Dell Computer’s Michael Dell, and Yahoo’s Jerry Yang. Naturally, Jerry Levin and Ted Turner (and his wife, Jane Fonda) were also there, as was Time Warner’s board, which had come along for a longer “news” tour of the country. The Time Warner group were treated like visiting pashas by the Chinese government, whose leader, Jiang Zemin, kicked off the event with a keynote speech.
Steve Case was not initially on the invitation list. But with the aim of getting to spend more time with Levin, AOL had called seeking to be invited. Fortune was thrilled to have him—especially as the positive buzz around AOL had been rising through the summer, and Case was becoming a popular executive to have around especially for a planned side tech program. He got many chances to talk to Levin at the conference and later when a smaller group traveled north to Beijing for several anniversary-celebration events, including lunch with the city’s mayor. And a big opportunity came at one of the first major gatherings, a sumptuous dinner in the Great Hall of the People.
At the end of the dinner, as guests were leaving, a torrential downpour turned out to be a good omen for Case. Everyone was forced to wait in the entryway for their cars, and Case, Levin, and Turner, as well as Jane Fonda, ended up deeply engrossed in conversation. Many others took note of the unusual group, their heads bowed together in what was clearly an intense encounter. “What were you all talking about?” one reporter who was there asked Case later. He just smiled cryptically.
The three weren’t actually talking about any kind of deal, but rather of big, airy ideas about the global market and the role of business in society. And their conversation continued on October 1, when they were again thrown together at a massive and endless parade of soldiers and citizens and tanks and flag-waving held in Tiananmen Square. This was surely the kind of theatrical backdrop one might imagine for the moment that the spark of a big deal was struck—but Levin and Case were still only talking about big issues. Luckily for Case, who stuck around to be with Levin, Communist parades are notorious for being deadly dull and interminably long, so he had lots of time to woo Levin. And this parade was the granddaddy of all Communist parades—it lasted eight hours, providing the pair plenty of time to talk while huddled in the open viewing stands on Tiananmen’s gate. The parade’s end was punctuated by a magnificent fireworks display that lit up the clear sky, which the previous night’s drenching rain had cleaned of the normal polluted smog of Beijing.
Levin later said he wasn’t immediately thinking of any kind of merger, although he was aware that AOL was looking for a big deal. He told me he considered Case more of a “star-fucker—you know, he liked being around all this power and such that was not so common in the Internet space.” Levin added that he did enjoy talking about corporate values—both expressing the idea that a company had societal and cultural responsibilities beyond the bottom line—but that he wasn’t thinking of anything more substantive related to AOL. “I put it out of my mind,” he said, “because I didn’t think anything would come of it.”
Maybe nothing would have, but within weeks Case was on the phone to Levin proposing a merger of equals, already intimating that Levin would naturally be the CEO of the resulting megacompany. Levin demurred at first, telling Case, “I don’t see it. But I will call you back.” He then went immediately to both Richard Bressler and Dick Parsons. Levin told his close executives that he felt cautious, since he’d heard all the stories about how AOL was a very arrogant group. They thought it best to keep all options open, looking at the range of possibilities that crossed their path.
Still, he agreed to meet Case for a private dinner on November 1 at New York’s
Rihga Royal Hotel on West 54th Street in Manhattan. “I said, ‘You and I can get together to talk about aspirations,’ and I found him unusually idealistic,” recalled Levin, who noted that Case seemed to share his vision that a company was about more than profits. “He was certainly mouthing the words, and it made me think the culture of AOL was more humanistic than I thought.” Case made sure that impression prevailed by avoiding talk about the nuts and bolts, playing on Levin’s weakness for vision and spinning a world of convergence that their combined company could rule.
When I’m in one of my more cynical moods, I think Case was just selling Levin. And yet, in many years of covering him, I could never get Case to shut up about this kind of stuff, even though he often delivered this idealistic message of the future in the flat tones of an animatronic dummy at Disneyland. I do believe, at least initially, there was a mind meld going on between Case and Levin. And I believe Levin had great hopes of moving to a higher plane of business with Case, even if such reveries were naïve and a bit delusional given how rapacious both AOL and Time Warner—not to mention Case and Levin—could be.
The mundane details of how a deal might work out were left to Rich Bressler for Time Warner and Miles Gilburne and Ken Novack for AOL. By the middle of the month, Gilburne and Novack traveled to New York for a series of “think sessions” with Bressler, to outline what a combination of AOL and Time Warner might look like. Not initially focused on the cost synergies, the group first looked at more forward-facing ideas, such as digital media and music and interactive television. “It was a lot of circles on the white board,” said one person privy to the meetings. “Very high concept, very pie-in-the-sky.”
These sessions went so well that Levin and Case planned another meeting to talk turkey; they also decided that Case should have a meeting with Ted Turner, Time Warner’s biggest shareholder. Levin wanted Turner, whose shares represented almost one-tenth of the company, to be on board early and with enthusiasm. Both Levin and Case had seen what had happened at Lycos and other companies when large shareholders were not cooperative. Besides, if Turner was on board, it would likely have a major influence on other key shareholders such as John Malone and Gordon Crawford, the powerful media investor from California-based investment fund mammoth Capital Research and Management.
Turner was actually more interested in making another run at NBC, but he went along with Levin’s request since things had been going well between them and at Time Warner. Levin and Case knew they had to convince him it was for the good of the shareholders and the good of the company. “They painted it as the deal of the century for Turner, telling him things like we will not close until you sign off,” said someone who knows both sides well. “I think they coerced him into making him feel he would be the power.”
The question of power was actually a sticking point even before Case’s scheduled November 17, 1999, meeting with Turner took place. Things went awry the day before when Case and Levin met alone in Manhattan at the St. Regis Hotel. There Case stopped talking in airy visions and got down to brass tacks. He suddenly began focusing on making sure that AOL would get carriage on Time Warner cable systems. And as AOL stock headed further upward, he worried openly about the hit his company’s shares could take if it didn’t end up with a much larger stake in the combined company. Case proposed a 60/40 percent split, in AOL’s favor, unless it got more governance power in exchange for a lesser stake. Levin thought Case had overreached. “If this was just about cable, it was not what is was all about to me,” said Levin. “And suddenly it felt like it was an AOL takeover plan.”
The pair parted, and Case went back to the Pierre Hotel, where he had a glum meeting with his team. “Is it ‘off off’ or just ‘off’ for now?” asked CFO Mike Kelly. Case had no good answer, but still kept his date the next day with Ted Turner, who had been briefed by Levin on the conversations. Though Levin seemed to have soured, Turner now was enthusiastic about the idea, and he urged Case to persevere. He even suggested that Case insist on being CEO instead of Levin, people familiar with the meeting told me, an indication that Turner might not have gotten over his pique at Levin quite yet. Case told Turner that wasn’t a “viable possibility,” sources said, and that the idea was surely a deal breaker.
Unless, that is, the deal was irreparably broken already. As one deal participant said, “It had fallen off the rails.”
If You Can’t Be With the One You Love
AOL and Time Warner wasted no time in trying to find alternatives to each other, scouring for as big a blockbuster as they could find across the interactive landscape. Both were serious, but each also needed a stalking horse that might shake the other up enough to get back to the bargaining table.
Time Warner quickly turned to Yahoo. Levin had met and been deeply impressed with a very young Jerry Yang, one of the cofounders of the spectacularly successful Internet directory and portal. With the biggest Web audience, Yahoo had become a powerhouse, known for its simple, fast, and uncluttered delivery of all kinds of information, and it had done so with little of the rough behavior AOL had gained a reputation for. Its valuation had headed skyward, too, making Yang a multibillionaire in his first job after leaving college. Yahoo was also, unlike most Internet companies, profitable.
I had called Yang as soon as I got to California in 1997. Aside from Amazon’s Jeff Bezos, eBay’s Meg Whitman, and RealNetworks’s Rob Glaser, Yang was the Web icon most central to the whole boom. Levin, who had long been interested in Yahoo, liked Yang. So he sent Bressler to meet with Yahoo’s leadership many times, which included CEO Tim Koogle and his number two, Jeff Mallett, as well as Yang. The two sides had several meetings in late November and early December about what the companies could do together and how both sides saw the world evolving. But Bressler was coy, and if he had a bigger idea, the Yahoo team was hard-pressed to figure it out. “He was not specific at all,” Yahoo’s CEO Koogle told me. “We huddled and asked ourselves, ‘Are they serious, or are they just fishing?’ ”
The Yahoo team was torn, since they, too, were worried about the insecurity of Web valuations and wondered if they could survive without a big media partner. They also wanted to stay independent if possible, and didn’t want to venture so quickly outside the company’s core competency or outside the Net. Doing a deal, even if that meant that Yahoo would grab a major stake, meant selling the company. Unlike AOL executives, whose egos were much larger, the Yahoo team thought they would surely get lost in the shuffle and that they were ill-suited to try to run a complex media company. They were also dubious that old and new media were really natural partners. “We were more practical in our approach,” said Koogle. “We were in a quickly moving industry where speed of decision and execution was key. And we thought being tied to a very large company might slow us down.”
Time Warner was also reticent, because of Yahoo’s valuation and also because it didn’t have a huge base of paying subscribers like AOL. Being totally ad supported, Yahoo was a much riskier proposition for Time Warner, making it hard to justify the unequal valuations. And soon enough, Levin would be put off by the same whiff of arrogance from the Yahoos that he’d picked up from Case.
At a dinner with Yang and Mallett at the elegant Upper East Side French bistro Le Refuge in Manhattan, Levin started lecturing the pair on Yahoo’s inflated currency, asking how its business was sustainable. Mallett, unfamiliar with the subtleties of the media world dance and frustrated by Levin’s cryptic nature, shot back quickly and arrogantly.
“Why are you peppering us about our business when you’re the ones without any growth?” he snapped, then uttered the most annoying Web mantra of the era: “You just don’t get it.” The remark, more confrontational than it needed to be, made Levin cringe. A few more meetings did take place, but the Yahoo option was pretty much off the table.
AOL had moved onto its doubling-down-on-the-Internet option by stepping up talks with a number of Web companies, most especially eBay. AOL was impressed with the online auctioneer�
�s huge growth, and eBay had been one of the few ad partners who had seen gigantic gains from its AOL deal. It had signed increasingly large agreements with AOL and had seen major payoffs to its business, since AOL subscribers and eBay users were demographically similar. Executives at the companies also had a good rapport. The two companies began talks, and soon AOL’s Miles Gilburne was coming out to Silicon Valley to work on what it would call Project Dock, as in “dock of the Bay.”
Today, in late 2003, with eBay in ascendancy, it’s clear this deal would have been a huge boon to AOL. But, at the time, things were rockier for eBay, which was facing competition from several companies, worrisome technology issues, and an inability to leverage its brand worldwide. A big company like AOL, eBay executives thought, might just be the ticket to solve their woes. AOL promised the possibility of keeping eBay a standalone business, run by Meg Whitman, eBay’s steady and well-respected CEO. Whitman had racked up considerable experience in a range of traditional companies including Disney and Hasbro before joining eBay, and she was a proven and experienced executive much admired by Case and especially Pittman. It was even possible that Whitman might make a good candidate to run the whole company someday, as she was just the kind of mature executive AOL sorely needed.