There Must Be a Pony in Here Somewhere

by Kara Swisher

  So we knew it was going to happen, and it did. The Black Horsemen came and cut down the revelers, even those with names of virtue engendered like Prudent and Faithful and American and Growth. . . . Not only did the market go down, it kept going down. . . . Another day it would come back, but not until an unscarred generation, so bold with memories, had become scarred like its predecessor.

  ADAM SMITH, The Money Game

  Chapter Five

  PURSUING THE PUTZ

  Was it: “We are, you putz”?

  Or was it: “Putz, we are”?

  This subtle distinction has taken up more minutes of my life than it ever should have. Starting out, the only things I knew for certain were three basic facts.

  The first: That this was a colorful riposte supposedly uttered by AOL’s top deal maker, David Colburn, to a Time Warner counterpart during the weekend of due diligence that was conducted in advance of the consummation of the biggest merger of all time. “You’re making it sound as if you’re buying us,” the Time Warner exec had joked to Colburn, who had actually held his tongue. But with AOL colleagues later, the eternal bad boy had quickly dropped all pretenses, and made the remark. Definitely not hewing to the laughable “merger of equals” party line put out by the deal’s architects, Colburn’s quip offered his own brass-knuckles take on the situation.

  Second: That T-shirts were made, white with a blue logo, with this very phrase on them—“Putz, we are,” as it turned out—and given later to Colburn’s notorious Business Affairs team. There was a generous amount of chortling over the shirts, which expressed, to the group’s admiration, Colburn’s screw-you toughness against the Time Warner empire that AOL had just conquered.

  And third: That putz is vulgar Yiddish slang for a penis.

  I also know for certain that this is not a good story to begin the relationship of AOL and Time Warner. But the “putz” incident took on a life of its own soon after the deal was consummated and became a corporate urban legend, with multiple, and often incorrect, versions bandied about. But like any good urban legend, it owed its existence to some very real problems—ones that were apparent right from the beginning of the AOL Time Warner merger.

  The heart of the problem was this: That even if the most basic idea underlying the combination of AOL and Time Warner—the premise that there will and should be an eventual and inevitable convergence of all media and digital products—is a valid one, this particular marriage seemed doomed from the start. Today, that’s easy enough to see and to say, as people pick apart the merger much as you would the breakup of a couple you predicted were headed for divorce court even before the wedding banquet’s appetizer course.

  As with any ultimately doomed union, if you slowly wind the merger backward from its messy end to its promising beginnings, you can more easily see how the meltdown happened. From its faulty conception to its deeply flawed execution to its bungled handling of a recovery attempt, there is no point in this melodrama that in hindsight was not a painfully obvious misstep. But it was an evolution of small steps in the wrong direction, so it was hard to see the merger running aground from the very start.

  But even hindsight doesn’t allow one to discover the full truth of what happened to the AOL Time Warner merger—a tale that soon reminded me of a souped-up version of the classic 1950 Japanese drama Rashomon. The big question in that film, in which characters describe the same heinous crime from differing viewpoints, is the same one you might ask about this deal: What’s the real truth? Or, perhaps, is there any truth at all?

  That’s because in this tale, there aren’t just two versions of the same event, as is often the case in reporting a business story. Instead, there are multiple versions. And each and every version depends on a complex and arcane number of factors, including but not limited to who lost money and who didn’t; who sold what and when; who lost power and who gained it; how they acted when they gained it, and, more important, how they should have acted; who came from Time and who came from Warner and who came from Turner (unless, of course, you were dealing with AOLers, and then everyone at always fractious Time Warner was suddenly one united company against the vile barbarians of Virginia); who thought the Internet economy was a bubble and who did not; and who had no clue, but took advantage of the situation anyway.

  But a few things are eminently clear and easy to outline in a few broad strokes. As it turned out, the problem began on the very first day, with the announcement itself: An orgy of high-fiving and self-congratulation so over the top that it was as if completing the deal itself was the winning move. By declaring victory immediately, the group in charge set in motion a pattern of overpromising and underdelivering that would make meaningless any forward movement at the combined company under the questionable mantle of “synergy.” The result was that whenever anything was actually accomplished, it looked very small, throwing off a sad little is-that-all-there-is vibe both externally and internally.

  This was most destructive when it came to the financial bragging that seemed recklessly ambitious from the moment the big numbers—$40 billion in revenue, $11 billion in cash flow, $1 billion in savings—went up on the board. When some top executives, including Steve Case, began selling a lot of stock even as they continued to tout those handsome projections, they later looked suspect. Worst of all, these numbers, which would ultimately hang the merger, were entirely of the executives’ own making. Essentially, their need to prove the deal’s worth got tethered to impossible-to-reach numbers, resulting in a kind of financial suicide.

  Most problematic, since the AOL unit was cast as the principal driver for growth and synergy in the merger, was the bust of the dot-com sector—which began almost immediately after the deal was struck and intensified over 2001. Since AOL was a bit higher up on the Web food chain, the reverberations of this decline were less noticeable at first. But the implications of the Web bust would eventually reach AOL, too. It was in this time, perhaps not surprisingly, that AOL—never shy in striking aggressive ad deals—started to commit some even more edgy accounting tricks to preserve momentum. These moves would later come to haunt the merger.

  Meanwhile, even as the declining economy rang a distant bell of trouble, AOL took over the reins of AOL Time Warner in a take-no-prisoners style that would chafe those on the Time Warner side. There was, no doubt, terribly bad behavior on the part of AOL, ranging from the silly to the very serious. With little media experience, but a lot of hubris that their way was the way of the future, the AOL crew rampaged through Time Warner with little care and no sense of respect. They mandated change without a solid knowledge of the businesses they sought to control; they were often rude and arrogant while doing so; they bragged of their copious accomplishments and talents even as their own business began to suffer badly.

  And while much has been written in the daily press about the AOLers’ power mongering—the prevailing notion became, as AOL investor relations head Richard Hanlon described it to me, “the attack on the fair maiden Time Warner by the molester AOL”—it is not altogether accurate to say Time Warner was simply a victim of this boorishness. Continuing in the long tradition of protecting its fiefdoms while feigning cooperation, Time Warner played a delayed game with its new AOL conquerors. In what became one of my favorite expressions of the merger, one top executive at AOL noted that Time Warner’s passive-aggressive style—honed from years of ignoring dictates from the corporate center—amounted to simple “grin-fucking” of AOL executives who were pressing them.

  Perhaps most damaging of all was the lack of both a common goal and the emergence of a central leader. Despite all the hoopla, no one in this group of individually powerful people ever really had the ultimate power to give the deal a true vision or to force lasting change. Without strong leadership, which is not the same as strong-minded leaders, the merger’s failure degenerated into a blame game at the highest levels of the company, where everyone thought he was right and no one would admit being wrong. Was it a takeover or a marriage? Sadly, n
o one ever knew.

  In other words, there are no heroes here. And the putz T-shirts were the first clue of that. Even I know the cardinal rule of successful merger integration: Do not compare one of your new colleagues to genitalia.

  In fact, it got much worse than that, and very soon.

  The Dating Game

  On January 10, 2000, there were only smiles, backslaps, and those unfortunate high fives all around. At the Equitable Center in midtown Manhattan, an array of euphoric executives lined up to announce Jerry Levin’s latest, greatest “transforming transaction”—the $183 billion marriage of AOL and Time Warner. Together, according to the Wall Street Journal, the companies were worth almost $319 billion.

  Seated in a row on the stage were the new stars of this media colossus, including Steve Case, Jerry Levin, Ted Turner, Bob Pittman, and Dick Parsons. Also on stage was AOL’s CFO Mike Kelly, whom Levin had selected to be chief financial officer of the combined company. My first thought on seeing that line-up on television was that there were an awful lot of people up there on stage. It reminded me of a Wall Street version of The Dating Game, with all the contestants perched on stools, waiting for their chance to impress the audience. With klieg lights and swarming photographers, this was more than just a merger—it was a high-concept production number. “There were a lot of people who had to talk,” observed Time Inc. editorial director John Huey to me later. “It was like a commune.”

  In some sort of strange fashion homage, Levin had even dressed down for the announcement, lending another odd touch by showing up in the dot-com uniform of khaki pants and an open-necked shirt, having shaved off his mustache for the first time in more than three decades. Steve Case, on the other hand, tried to appear statesmanlike in a dark suit, blue shirt, and yellow polka-dotted tie. But this conservative attire didn’t prevent him from doing a happy little hip-shaking dance onstage and joyously hugging the heretofore unhuggable Levin.

  Just about any big merger announcement incorporates a certain amount of hyperbole. But the rhetoric surrounding this deal, the largest merger in history, was truly epic. Steve Case, the new media kingpin, opined grandly, “We’re kicking off the new century with a unique new company that has unparalleled assets and the ability to have a profoundly positive impact on society.” And also: “This is a historic moment in which new media has truly come of age. . . . We are going to be the global company for the Internet age. . . . This will be the Internet Century.”

  He later declared to reporters that he hoped AOL Time Warner would be bigger than Microsoft or General Electric. And Case had even larger goals, noting later to Wall Street and the press that he hoped that AOL would someday have a market capitalization of $1 trillion, with $100 billion in annual revenue.

  Ted Turner, of course, did him one better by offering his own now legendary take on things, comparing how it felt to approve the deal with his first major sexual experience. And he was equally pumped up in the bathroom before the announcement, where he slapped Bob Pittman repeatedly on the back, crowing, “We have to make this work! We have to pull together! This is just amazing!” He even joked giddily that he had never “made $1 billion before breakfast.”

  The stock price would turn out to be a good barometer of Turner’s mood about the deal over time. Gone, for the moment at least, was his grumbling about the fact that AOL—with only one-fifth of the revenue and less than one-third of the operating cash flow—grabbed 56 percent of the combined company. Turner was even heartened a bit, because if the deal had been based solely on stock valuations, AOL would have owned at least 12 percent more.

  At first, in a reflection of the frothy times and moment, the press and Wall Street focused mostly on the premium AOL paid over Time Warner’s share price. To many, the merger was the final sign that the old economy was tossing in the towel, and that Time Warner had finally managed to make a bold and necessary move into the future. Despite the fact that synergy—particularly at Time Warner—hadn’t worked before, most reporting on the deal centered on the notion that this was destined to be an invincible combination.

  I certainly thought as much, although I was more in awe that AOL had been able to pull it off than anything else. But the combination did seem to suggest immense promise, given the possibilities that one could imagine between the various parts of AOL and Time Warner. In one major move, the two companies had seemingly addressed their weaknesses and intensified their strengths. I won’t deny I really believed that, as did many others—many of whom now pretend they never did.

  But behind the scenes, other media company moguls began to shake their heads in wonder that Levin had made such a shocking trade. Many noted that he might have done a deal of this magnitude to distract from his inability to manage what he already had. They also marveled at what he had given up, since there had long been a pervasive feeling among them that dot-com valuations were insane. Still, Time Warner’s acquiescence was a powerful reminder that the Internet boom seemed to be gaining power rather than losing it, as had been long predicted. Soon enough, the AOL Time Warner deal would set off a stream of strategic reevaluations that led to more talks between the remaining media and Net companies, although mercifully no deals like this one were struck.

  “In the lens of the moment, I was amazed by it, and so were others,” said Barry Diller, the one media mogul who had deep experience in the Web arena, and who had tried a similar combination with his 1999 attempt to acquire Lycos. “A lot of people sat around the table and said, ‘This is great.’ ”

  Big institutional shareholders surely did. AOL and Time Warner had called their largest ones, including Capital Research and Management’s Gordon Crawford, immediately before the announcement. The investment company held massive amounts of shares in both companies, and Crawford’s view—which was enthusiastic at the beginning—was crucial to the merger’s ability to gain credibility on Wall Street.

  Executives quickly called other potentially influential shareholders, such as John Malone (whose large parcel of shares actually had no voting power), asking them to be as supportive as possible. In fact, Ted Turner called Malone to ask him what he thought. “I asked [Turner] if he supported it, and he said, ‘Yes, I guess, but they did not give me a lot of time,’ ” said Malone, recalling that the response worried him a bit. “But, like a lot of people, I decided to hang on for a bit of the ride anyway.”

  So did the employees of both companies, most of whom had no idea the deal was brewing until word began to leak out over the weekend. Inside both AOL and Time Warner, the reaction was most definitely mixed.

  On a positive note, Time Warner employees were thrilled with their stock’s upward trajectory immediately following the deal. It rose 39 percent by the end of the first day of the announcement. Their joyous mood at this development was further elevated by the fact that all their stock options immediately vested—in other words, they could buy and then immediately sell them at a major profit. Many outside compensation analysts considered this early vesting dangerous. The result of old rules enacted in case of an ownership change, early vesting could, some speculated, prompt the departure of Time Warner executives who would have no financial incentive to remain. But others considered it a deft way for Levin to buy silence from any dissent, especially as Time Warner shares surged further upward.

  At AOL, the reaction over the share price was almost the exact opposite, since many in the company would not be able to vest a bulk of their options until a year after the deal closed. In addition, as major AOL shareholders, they were used to owning a high-growth stock—and now they had apparently been hitched to a slow-growing one. That disparity was made clear when AOL shares started to tumble almost immediately as news of the deal spread, even though bankers had advised the company that the market reaction would remain neutral.

  AOLers were also worried that the disparate and slothlike nature of Time Warner might hinder what they considered their own more nimble culture. “Welcome to middle management,” said AOL service head Jon Sa
cks to a colleague as they walked out of the room where they’d just heard about the deal. More troublesome to AOLers was Time Warner’s well-known reputation for corporate intrigue; many considered the media giant a minefield of competing agendas. In fact, the top ranks of AOL considered Time Warner a culture that didn’t care to change, where the executive credo seemed to be “Deny, delay, and retire.” One strong voice against the merger on this particular issue had been Bob Pittman’s close adviser Kenny Lerer, who had dealt with Time Warner in the past. Lerer was deeply worried about both the political nature of the media giant and the mismatch of cultures.

  “It is unrunnable,” Lerer told AOL vice chairman Ken Novack on the day the deal was announced, in what had become his refrain. “We have destroyed AOL.”

  Concerns over the cultural issues also ran high at Time Warner, given AOL’s reputation there as an aggressive team with boundless arrogance and looser ethics even then. “The Nazis have invaded Paris,” warned one Time Warner executive who had worked with AOL and had seen some of their tactics. “They are going to strip us clean.” Jealousy obviously also played a role here, given the vast wealth Time Warner’s new partners had—a painful déjà vu to Time’s merger with Warner. In addition, many employees were also annoyed that AOL had seemingly bought them, despite the efforts to paint it otherwise. One Time Warner executive called me the day of the merger, looking for my opinion of the AOL team. “Well, you broadcast The Sopranos,” I joked, referring to the popular HBO gangster drama. “But they are actually the Sopranos, since they just stole your company fair and square.” I thought it was funny, but he was mortified.

  Inside AOL, in fact, calling the deal a merger was considered a joke, despite dictates from Case and Novack to do so. “We only said it around Time Warner executives to make them feel okay about the situation,” said one executive to me in the spring of 2000. “But to us, it’s an acquisition pure and simple.” AOL thought its power would give it the leverage to finally unify the disparate Time Warner culture, which the online company’s executives often likened to the bickering European countries.