Under normal circumstances, news that a company may have to pay $510 million in fines would be tantamount to disaster. But in Time Warner Inc.'s case, investors celebrated, pushing its share price temporarily to a 52-week high yesterday afternoon.
For more than two years, the New York-based media giant has been grappling with the uncertainty of investigations by the Department of Justice and the Securities and Exchange Commission into possible bookkeeping irregularities at America Online Inc. during the dot-com era. Under the deals announced yesterday, Time Warner would pay $360 million in fines and $150 million for a settlement fund.
Audio: The Washington Post's Jonathan Krim discusses Time Warner's $510 million settlement of criminal and civil charges from an accounting scandal at AOL.
A Look Back AOL Time Warner stock price weekly closes.
SEC members must still approve that agency's part of the agreement. But conclusion of the investigations, analysts said, would allow the company to operate more freely and aggressively again. Perhaps more important, settlements would help Time Warner further distance it from its ill-fated January 2001 merger with Dulles-based America Online.
"It removes a big cloud from the company and provides a return to normalcy," said Matthew J. Harrigan, managing director of Janco Partners Inc., an investment firm in Colorado.
Time Warner's chief executive, Richard D. Parsons, was eager to settle the cases so the company would have as much flexibility as possible in how it pays for acquisitions in 2005. The corporation has said in public filings that it is unlikely the SEC would approve the issuing of new shares of stock in the company or any of its divisions until the AOL matter is resolved.
In recent months, Time Warner has expressed interest in several expensive acquisition targets -- online ad firm Advertising.com (which it bought for $435 million), Hollywood's Metro-Goldwyn-Mayer Inc. (which it lost to a group led by Sony Corp.) and bankrupt Adelphia Communications Corp. (outcome still pending).
An Adelphia deal could lead to a broad realignment of interests in the cable industry and allow Time Warner to finally leverage its ownership of both the entertainment content and the cables that deliver them. It has been difficult for Time Warner to make any daring moves in that arena because its main competitor, Philadelphia's Comcast Corp., the nation's largest cable television operator, also owns a 21 percent stake in Time Warner's cable assets.
Time Warner has been in talks to team up with Comcast to bid for part or all of Adelphia, which has 5 million cable television customers. Under one scenario being discussed, Comcast would take control of a majority of the acquired properties and would give up some of its stake in Time Warner Cable.
The biggest question may be what Time Warner decides to do with America Online. Investors and analysts have speculated that the unit could be sold, but company executives have said they have no such plan. AOL has been losing subscribers who have switched to cable Internet and high-speed DSL from the company's dial-up service, and it is widely considered to be a drag on Time Warner stock.
"The promise of why they came together obviously never came to fruition, but now they are together what can you do with that?" said Bruce Leichtman, president of Leichtman Research Group Inc. in New Hampshire.
After climbing more than 2.5 percent in early trading Wednesday, Time Warner shares closed unchanged at $19.38 on the New York Stock Exchange. Some financial analysts expressed optimism that the stock would rally in the coming days. Time Warner "should trade up on this news as it indicates pending resolution of this over two year overhang," Jessica Reif Cohen of Merrill Lynch & Co. wrote in a report.
Time Warner's problems are hardly over. The company is threatened by a number of shareholder lawsuits. Morningstar Inc. analyst Thomas Forte has figured in a $2 billion contingency for the settlement plus the outstanding shareholder lawsuits.
In addition, Stephen M. Case, who was America Online chairman at the time of the merger; Gerald M. Levin, Time Warner chief executive at that time; and other officials must defend themselves against civil allegations that they knowingly misrepresented the companies' financial state.