AOL-Time Warner Merger

Washington Post business columnist Steven Pearlstein was online to discuss AOL co-founder Steve Case's call to divide Time Warner. Case wrote an Opinion piece in The Washington Post on Sunday and discussed the issue in an online discussion on Monday.

In today's column , Pearlstein also examines the decision to split Viacom in two.

A transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here .

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Laurel, Md.: Warren Buffett believes the best investments are those protected by patent, copyright, trade secret or strong brand identification of a product for which the public will accept no substitute, like Coca-Cola or The Washington Post. The worst are capital-intensive industries that produce a commoditized product or service, like steel mills, phone companies or airlines.

AOL combines some features of both. Just about everyone I know once had an AOL account and has discontinued it for either a cheaper ISP or broadband.

Has AOL built strong brand identity for its proprietary content; or are they mostly an ISP for internet neophytes?

Steven Pearlstein: The first thing I would say is that Warren Buffett never invests in technology companies. He claims it is because he doesn't understand the stuff. But I think the other reason is that he likes franchise businesses in mature industries where the terms of competition aren't constantly changing. So he might admire an AOL but not buy into it.

As to your question, the part of AOL that offered people Internet access is obviously a commodity now, and nobody can charge a premium for it. AOL is getting out of that business, in effect, as it moves to broadband, where it has to focus on the content and service part of its business, which continues to evolve and improve but is nowhere near as dominant as it once was.

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Arlington, VA: Alec Klein and I believe David Vise wrote a couple articles covering the Dept. of Justice going after some former AOL executives. I know the DOJ indicted some lower level former AOLers...what's the latest on Colburn and the other senior execs?

washingtonpost.com: David Vise will be online tomorrow at 1 p.m. ET. You can ask him that question by clicking here .

Steven Pearlstein: I have to say I don't know for sure. Colburn was forced out of AOL after Alec published his dynamite series and hasn't been heard much from since. He's not been charged criminally or been the subject of an SEC civil action but those are still possibilities I suppose (not sure what jurisdiction SEC has over him civilly).

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Alexandria, VA: I enjoyed your column today very much. While I think you may have underplayed what I would call the greed factor in these mergers, you've hit on something that's been bothering me for a number of years now. And that is, as you say, nobody's interested in managing their company effectively anymore.

I think a good deal of this approach is caused by the MBA factor. I'm an MBA and divsersification to reduce risk is, perhaps, the main theme of most business schools. So rather than being a great cereal manufacturer, always on the lookout for problems and profits in the cereal business you spend your time trying to buy a lunch meat company in case people stop eating breakfast.

washingtonpost.com: Today's Column: When Breaking Up Is Not Hard to Do

Steven Pearlstein: I didn't know about that emphasis in business schools, so that's useful new information for me. I should add that I'm not saying that all mergers or divestitures are always wrong, or that there can't be instances when efficiencies or synergies can be realized. But not all M&A activity falls into that category--not by a long shot.

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washingtonpost.com:

Alec Klein Series: THE DEAL MAKERS

Part I: Unconventional Transactions Boosted Sales

Part II: Creative Transactions Earned Team Rewards

Sidebar: Unorthodox Partnership Produced Financial Gains

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Herndon, VA: What is driving Steve Case to speak out now? Is he embracing Carl Icahn's "divide and sell" strategy for a short-term price increase so he can sell-off stock to fund Revolution? Or is he just disenchanted with what Time Warner is doing with AOL's $1 billion plus free cash flow every year (using it on TW rather than helping AOL compete against Goggle and Yahoo)?

washingtonpost.com: Icahn Demands 'Sunlight' on Time Warner Meetings

Steven Pearlstein: Well, I don't think you can tie this totally to the Carl Icahn move, since Mr. Case apparently was making his pitch for breaking the company up before Icahn revealed his investment. My suspicion is that he has felt a need for some time to lay out a defense of what he did as well as an admission as to what he didn't do, but he was constrained up to this point by legal risks and his obligation as a director not to air those kinds of thoughts in public. I think he also feels some obligation to his old colleagues at AOL to help them out, and the general feeling over there is probably that they'd be better off on their own (although they'd like to have some sort of alliance with the Time Warner cable division. The article was certainly part of the rehabilitation of Steve Case campaign, that also includes his starting his new venture. He's a young guy, after all, with a lot of his life in front of him and it is probably important to get the merger stuff behind him.

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Fairfax, VA: Hello,

Mr. Case said in his live discussion "...with each current share of Time Warner swapped for one share each of Time Inc., Time Warner Cable, Time Warner Entertainment, and AOL -- the shares would be worth more."

Is this likely to be how the stock would be broken up should this battle go Icahn's way? Are there other possible outcomes for the stock holder, should the company be broken up?

Thanks.

washingtonpost.com: Discussion Transcript: Steve Case

Steven Pearlstein: You know, I don't think companies should break up because donig so could somehow unlock hidden value for investors. That's really a very short term view of things and is almost by definition quite speculative. We're dealing here with a company with lots of very valuable franchises that need to be managed for the long run. If there are, indeed, not serious synergies to be realized, there is still the possibility of running separate businesses well and having a wide enough portfolio so that investors enjoy the advantage of hedging against one or another technology outcome. So I'd say leave things as they are for the most part and try to manage them well. Certainly I would not spin off the cable system assets, since the marriage of content and distribution is proving to be quite a successful model. Look at how Rupert Murdoch has used that to his advantage, in ways Time Warner can only envy. The key there is that Murdoch tells his divisions what they are doing to do, not the other way around, which was the case at Time Warner under Gerry Levin and, to a lesser extent, even today.

The point here is that success is not necessarily determined by the structure of the business. Success can be achieved through any number of corporate structures. But it depends, for the most part, on the ability to run the businesses well.

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Annandale, VA: I worked in 97 for AOL in their network operations area. I believe Steve Case when he says that he saw broadband as what the Time Warner purchase was giving AOL. When he says that he thought broadband should have happened on day one--he was right as rain. For whatever reason it didn't and Time Warner and AOL seemed to fight it out to rein supreme over one another and Time Warner won. It was a tactical victory but a strategic loss. The whole world is going to the Internet in terms of information and communication. Whatever Time Warner shows or publishes or communicates will probably someday be on some form of internet. Cable TV and the internet will blend but Time Warner execs, in my humble opinion, couldn't see that. AOL will probably now form with another technology company and grow and Time Warner will concentrate on improving their entertainment content. AOL and Time Warner were a blend of technology and content that couldn't merge--it was too early.

Steven Pearlstein: I was with you until the last line. I'm not sure it was too early at all, at least when it came to marrying the cable system division with AOL. That was the best strategic opportunity and they blew it. The cable guys stuck with their Roadrunner Internet service rather than migrating to Roadrunner/AOL and AOL migrating to an AOL/Roadrunner. The other stuff, like the cross promotion, was always going to be a very secondary advantage, and certainly not one that could justify the huge premium implied by the value of the deal.

Maybe this is the point where I mention the obvious: that at the price that Time Warner shareholders essentially paid for AOL, they were never going to be winners. AOL was buying Time Warner with grossly inflated paper and the AOL guys knew that.

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Washington, D.C.: Is Case looking to run AOL again?

Can AOL's "us against the world" culture play in a partnered enviornment with either an MSN or a Google?

Steven Pearlstein: He said not, and there's no reason not to believe him. My sense is that he's looking to close up that chapter of his life, which is why he wanted to write the article.

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Union Sation: Steven -

Thanks for your well-timed piece this morning. A little puncturing of the Steve Case "personal image" rehabilitation tour was definitely in order! Unbelievable that the architect of the merger thinks he's NOW the guy to call for the break up - highly laughable - haha.

On to the question - you touched on the lessening popularity of media scale and "synergy" (taught as a dirty word in B-school these days), given that, what would you recommend that Time Warner do going forward?

Steven Pearlstein: As I said, I recommend it focus not on another round of M&A activity, but learn how to run its businesses right and take advantage of whatever real synergistic possibilities still exist (and,yes, there are some). That's not to say that breaking the company into four pieces wouldn't work. But if Time Warner learns how to manage well, there's nothing that those four companies could do separately that they couldn't do while under the same corporate roof.

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Rockville, MD: Given the pressure from Icahn and Case to break up the company, which side seems to have the most leverage? What is the outlook and possible time frame for such action, and would it really improve shareholder value?

Steven Pearlstein: Icahn can wage a proxy battle, and he could probably win it, since the hedge fund guys are buying shares in the hope of taking advantage of a short term pop to the share price. That would put in place a badly divided board, and that's not in anyone's interest. So I'd say the upper hand here lies with the breakup position, even though I don't think it is necessarily in the long run interest of the shareholders or the individual operating businesses.

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Washington, DC: This is off-topic, but I just wanted to thank you for the column you wrote a few weeks ago about Alaska. It's been a long, long time since I laughed so much while reading a business column.

Steven Pearlstein: Thanks. Got a nice note the other day from Walter Hickel, the former governor and Nixon's Interior Secretary. Apparently he's been arguing that Alaska has never gotten the deal it was promised from the U.S., and was glad that I raised the question of whether this marriage is working. He even sent along a dollar bill in case I was starting a fund for somebody to buy the state. (Post rules required me to send it back.)

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washingtonpost.com: Alaska Would Be More at Home in Russia (November 23, 2005)

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Steven Pearlstein: Thanks, folks. This will be my last chat until 2006. Have a great holiday.

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Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.