There Must Be a Pony in Here Somewhere

by Kara Swisher

  And, in any case, the opportunity to grab AT&T’s cable assets was too huge. The long-distance giant’s cable systems had been subject to an unsolicited bid by the Comcast cable firm earlier in the summer and AT&T had initially rejected its offer as too low. Obviously, AT&T wanted a competition for its assets, and the names of other suitors soon popped up—including Disney and Microsoft. The idea of AOL Time Warner as a possible buyer came to notice after John Malone promoted the idea publicly in early September, which some felt was an effort to stir up excitement and prices.

  Levin had long been wheeling and dealing behind the scenes by then, submitting bids and attempting to make the deal happen. Merging the AOL Time Warner and AT&T Broadband assets wasn’t a bad idea, since it would create a behemoth by combining the largest and second-largest cable systems. This would immediately supercharge the company’s high-speed power, since Time Warner Cable only passed through only 20 percent of homes in the United States. As an added benefit, such a deal could also settle the complex ownership of Time Warner Entertainment, a stake that AT&T had inherited as part of its cable-buying spree.

  But—in arguments pressed by Case—the combination would also surely bring even more intense attention from regulators, including the FCC, FTC, and even the Department of Justice, as well as the ire of competitors. On top of that, AOL Time Warner was still carrying huge debt from its previous cable acquisitions. The integration alone would take much-needed focus off the still-festering problems at AOL Time Warner, Case thought.

  Still, Levin pressed on. “He did it to poke a finger in Steve’s eye,” said one corporate executive who watched the brewing fight. “And Levin was always in love with cable.”

  But while Case and Levin’s growing battle was publicly characterized as a tiff over the AT&T acquisition, it was about much more than that. Comcast ended up winning those cable assets—but the more important issue at AOL Time Warner was about who was in charge. The cable battle marked the end of the short-lived era in which Levin and Case’s relationship seemed so promising. Their mutual seduction had long worn off, and now the more mundane and disappointing reality of their relationship was about to be revealed.

  Poetic Justice

  As Case and Levin’s arguments intensified in the fall of 2001, Case began calling and visiting members of the board in an effort to persuade them that Levin had to go. Case had multiple arguments. Levin had held on to the aggressive financial projections too long, for reasons of ego. He’d become increasingly unwilling to work with anyone. He had refused to take direction on the cable deal and had kept the board in the dark about his deal making. He wasn’t the leader AOL Time Warner needed to halt the precipitous decline. He ignored strategic issues in favor of quarterly numbers. “He pretended to be in charge, and then would not acknowledge the reality that he was not,” said a source close to Case who knew his thinking.

  Some board members on the Time Warner side, including Dick Parsons, found Case’s effort to oust Levin appalling and resisted it—despite growing reservations about Levin’s leadership. Case thought they agreed with him, but Parsons and others felt Case was ignoring the process that such a large company required to consider such a move. Case, they felt, had grown up in a wilder environment where he controlled the AOL board, since it was seen as his company. But as soon as the merger was done, the combined entity ceased to be anybody’s company.

  But Case was aided by one key ally: Ted Turner, who was more than happy to join with him in impugning his old foe. Turner had attacked Levin throughout the later summer and into the fall over all sorts of issues, including his obstructing Turner’s continued efforts to buy the NBC television network. By the end of the year, he took his anger public once again. At a widely covered cable event in November, Turner mocked Levin for having called him his “best friend” years before, during the Turner merger. Noting he had never been to Levin’s home, Turner cracked: “I’m your best friend? If I’m your best friend, who’s your second-best friend? Nick Nicholas?”

  Now, Turner had an ally in Case, who gave him just the kind of credibility he needed, as well as an outlet for his longtime disgruntlement. At one November 2001 dinner of the board, Turner addressed Levin directly over the table for 20 minutes about what he considered was the CEO’s incompetence and also his dishonesty. The AOL board members, who had not experienced the long-running battle between Levin and Turner before, were surprised by his candor. “We always heard he was always the madman, but he did not sound like a madman,” said one board member. “This was not a two-week fix, and he made a good case that we needed to do something quickly.”

  With continued resistance from Parsons and other board members, however, Case couldn’t muster the board votes to bounce Levin from his job. But he had done serious damage to Levin’s ability to lead, and he began pressuring hard for a resolution. At a morning board meeting on December 5, he found one more ally in an unlikely source: Levin himself. Disgusted and tired, Levin had had enough of the struggle and decided to step down, since it was clear that Case had cobbled together enough board support to make his job impossible going forward.

  Many sources close to the board told me that it would have been easy for Levin to delay any action or to fight, and that he might have prevailed against Case’s coup attempt, since support for Levin’s ouster was tepid. But Levin, weary of the machinations he’d had to employ over the years to retain his power, said he didn’t have the heart. Now there would be no more politicking, no more sucking up, and no more war games. “People forget the merits,” he said to me in 2003. “When something turns south, people turn on you, so I said, ‘Forget it.’ ” In other words, there’d be no more Gerald Levin to kick around anymore.

  Levin resigned without the board taking a vote. As a parting shot at Case, he’d already worked out the succession, naming Parsons—who was then seriously considering taking over the CEO position at Philip Morris Cos.—as CEO of AOL Time Warner. Pittman had already told Levin he didn’t want the job, perhaps because he was acutely aware that the anger he’d engendered from the divisional executives would prove fatal. Besides, the board had also begun to sour on Pittman, for similar reasons, including Case. Levin told me he’d never felt Pittman was going to lead the company anyway, although it had been positioned that way by Levin many times. “I always considered Dick as my successor,” he said, although that had not been true only a few years before, because Parsons was considered more of a lawyer than an operator.

  When Levin announced he was stepping down, he gave a wide range of reasons for the decision—conspicuously leaving out the fighting with Case. In an email he sent to the company, he noted that he’d invoked a special provision in his employment agreement that allowed him to cut short his contract. “I felt that once my work was completed and I was satisfied with the company’s direction and progress, I’d invoke that provision,” Levin wrote. And his official statement implied his decision wasn’t sudden: “Given that we are almost a full year into the merger and that an outstanding management team is now in place at the company, I am convinced that AOL Time Warner should begin an orderly transition to a new era of leadership.”

  But the most interesting spin was a typically lofty Levin literary reference that appeared in many news reports—one his detractors would mercilessly skewer. In the Wall Street Journal, he explained, “I’m my own person. I have strong moral convictions. I’m not just a suit. I want poetry back in my life.”

  Later, Levin told me he knew people didn’t believe he meant that. At the time, I certainly didn’t. I assumed it was just some hokey declaration by a man who was desperately trying to justify a massive mistake that would surely outlive him. After all, in every reference to Gerald Levin from now until the end of time, the tarnish of the failed deal would be right at the top of the story.

  But after he stepped down, Levin didn’t seem to care about that anymore. He was finally free. And even though having sympathy for Levin is difficult thanks to his careless disregard for many
who’d been loyal to him, his lack of leadership after the merger and his inability to say he was sorry or wrong—to say nothing of the money lost—I have to say I was pretty glad for him.

  “What I want in my heart is not to be known as a CEO; I am a writer. A human being,” Levin told me at our last meeting. “I can’t believe any of this happened to me anyway.” And neither could Steve Case, it seemed—since in ousting Levin he had unwittingly planted the seeds of not only his own destruction, but that of the company he had spent his life creating. In his aggressive efforts to move Levin out, he hurt his reputation with the board badly and also pushed himself to the forefront as the real rage began to build against the deal. Until then, Levin had been a shield for Case. Now that he was gone, Case no longer had that protection.

  And though Case went along with it, he did not have a real choice in the selection of the new head of AOL Time Warner, Dick Parsons. Flicked aside like a flea in the initial months of the merger, the burly Parsons was generally perceived as someone on his way out. Even when he took over as CEO, I was struck by the assessment of one major investor, who characterized him as a “nonalcoholic beverage with greatness foisted upon him.” In other words, Parsons was the only one bland enough to be agreeable to all the warring constituencies.

  That was true enough. You couldn’t find a more genial leader than Parsons, who was the polar opposite of Levin in his sociability and of Pittman in his ability to get all sorts of dislikable people to like him. The cliché about Parsons, which frankly got a little wearying after a while, was that he was “nice” and “decent” and “kind.” Yeah, yeah, I wanted to say, he may be a sweetie pie, but can he deliver the goods? One thing was certain: The choice of Parsons—someone who appeared clean despite intense involvement in the mess of the merger and its aftermath—was a coup for the Time Warner side.

  This ability to move smoothly through life without making waves was a calling card of Parsons, who seemed to float from one successful endeavor to the next, trailing goodwill in his wake. His beginnings were unremarkable enough. Born in Brooklyn, New York, to working-class parents, he did not complete his undergraduate work at the University of Hawaii, but went on to finish at the top of his class at Union University’s Albany Law School. He worked nights as a janitor during law school.

  In 1971, the year he finished law school, Parsons became an adviser to then–New York Governor Nelson Rockefeller. He followed his boss to Washington when President Gerald Ford appointed Rockefeller as his vice president after Richard Nixon’s 1974 resignation. Eventually, Parsons would become an adviser to President Ford himself. When his work at the White House ended, Parsons became a partner with Patterson, Belknap, Webb & Tyler, staying with the firm for nearly 12 years before making another career switch. In 1988, he became president and COO of Dime Savings Bank, and he rose to the chairman and CEO position within two years. In that position, Parsons was able to engineer the bank’s turnaround, saving it from insolvency.

  Following his success at Dime, Parsons was offered the position of Time Warner president in 1995, after having been on the board since 1991. Although he had no experience in media companies, Parsons had the qualities that Time Warner, struggling to make its recent merger a success, desperately needed: A conciliatory air; a commanding presence; and a diplomatic, approachable working style. In the five years he was at the company before the AOL merger, his reputation was steadily burnished—even as his style seemed to keep him mostly under the radar of the press and the world at large.

  When he became co-COO with Pittman, with Case as chairman, many inside and outside the company scratched their heads trying to decide which side was really in charge now. Was Parsons just a placeholder before the final AOL coup, or the first sign of a Time Warner counterrevolution? At the time, AOLers were madly spinning the “sandwich” theory—Parsons would be squished between Pittman and Case and eventually squeezed out. Meanwhile, Time Warner executives relished the idea that Parsons’s ascendancy signaled the end of the reign of their brutish conquerors.

  Whoever had the upper hand, it was clear someone needed to take charge. By the first anniversary of the deal, in January 2002, AOL Time Warner’s stock hit a 52-week low of just above $25 a share, giving the company a rapidly declining value of $147.2 billion. The company’s earnings report that same month justified the drop, showing that the weak ad market and lack of synergy in getting any incremental revenues from joint company initiatives was taking its toll. The company reported revenue of $38.2 billion, up from the previous year’s $36.2 billion, but nowhere near the $40 billion promised by Levin. Cash flow rose 18 percent to $9.9 billion from $8.4 billion—impressive enough, but not even close to the promised $11 billion.

  The disappointment caused by that broken financial promise would soon pale in comparison to the calamities that would befall the company in 2002. Even though Jerry Levin was gone, a few of the company’s major investors soon began to feel that not enough blood had been shed. Someone had to pay for the gargantuan mess they’d landed in—and soon enough, someone would.

  It Sticks in My Craw(ford)

  Gordon Crawford was very, very angry.

  Even being simply angry was, in fact, unusual for the soft-spoken Crawford, a quiet man who looked as if he could have been a career accountant. He certainly didn’t carry himself as what he was: One of the most powerful figures in the media world thanks to being one of its savviest and most influential investors for more than 30 years. As the media stock-picking guru for the Los Angeles–based Capital Research and Management, Crawford commanded billions of dollars of capital, and he wielded it with discrimination and force.

  A close adviser to all major media moguls, Crawford used his financial heft to nudge them in directions he deemed correct. Despite his immense power, he was considered a gentleman who avoided the kind of overt confrontations or egomaniacal bluster that were typical of the executives he invested in. Usually, after intense study of financial documents, Crawford would communicate his views directly and calmly and follow through with his investments only after rigorous analysis. He prized loyalty above all else, and believed in long-term investing in companies he bet on.

  In its various incarnations, Time Warner had been one of Capital Research and Management’s longtime and large investments under Crawford. He had supported the merger with Warner and had been extremely influential in Ted Turner’s decision to sell his company to them in the mid-1990s. Turner considered him a key voice and had consulted him frequently since then. And, over the years, Crawford had developed a close professional relationship with Levin, who also relied heavily on his advice. (The pair had another thing in common: Crawford, too, had lost a son—his in a tragic climbing accident.)

  Right from the merger’s announcement, Crawford, who understood that dealing with digital issues would be critical for Time Warner, had been supportive of the merger. While he’d long been wary of AOL’s aggressive style, he had invested in the company many times and he didn’t object to the deal, believing that Levin would control any possible excesses. But by the end of 2001, having suffered huge losses on his fund’s stake of 113 million shares, he was starting to get ticked off.

  Crawford’s pique worsened when AOL Time Warner revealed its preliminary results for the 2001 fiscal year on January 7, 2002. In that report, Crawford found numbers that were much different from ones former CFO Mike Kelly had told him about in the fall of 2001, and he felt he had been lied to. The first surprise was hundreds of millions of dollars in additional losses from the online unit’s joint venture with Bertelsmann in AOL Europe.

  The second surprise was that substantial earnings were about to disappear thanks to the early termination of AOL’s iPlanet business software alliance with Sun Microsystems—without adequate notice of the details to shareholders by company executives. The deal between AOL and Sun was dicey enough, a convoluted scheme cooked up as part of the Netscape acquisition. Simply put, AOL and Sun were involved in an I’ll-scratch-your-back-if-yo
u’ll-scratch-mine transaction that appeared to have few real benefits other than to pretty up the bottom line of both companies.

  In the complex deal, AOL had agreed to buy hundreds of millions of dollars’ worth of Sun hardware and services at list prices—rather than at the discount the company doubtlessly would get in an arm’s-length transaction. In turn, Sun agreed to spend hundreds of millions at AOL for licensing, marketing, and advertising services. Sun also guaranteed another almost $1 billion in other revenue commitments over time. In 2001 alone, the deal had added $400 million in revenue and $320 million in cash flow to AOL’s bottom line, which Crawford felt AOL had not made clear. That deal was now ending, as described in confusing language that was buried deep in the company’s arcane regulatory filings. Still, a more heavy Wall Street would figure it out, and Crawford knew it was a development that was sure to send the share price hurtling downward.

  The day after the company unveiled the results and held a conference call to explain the changes, Bob Pittman delivered an address at an investment conference taking place at an Arizona luxury hotel. As he listened to Pittman, Crawford grew agitated, believing his address was too optimistic considering the dire circumstances. In the speech, Pittman apologized for missing expectations, but then continued to try to make things look rosier than ever. Speaking of silver linings in the ad recession that would only benefit AOL Time Warner, Pittman stressed the power of synergy and the company’s great growth prospects.