Time Warner Inc. yesterday more than doubled the size of a stock buyback program under pressure from corporate financier Carl C. Icahn and hinted that a deal involving its America Online unit appears likely with Google Inc. or rival suitor Microsoft Corp.
Richard D. Parsons, chairman and chief executive, said Time Warner will increase the size of its stock repurchase from $5 billion to $12.5 billion. Icahn, who heads an investor group that owns about 3 percent of the company, has called for Time Warner to buy $20 billion worth of its own shares. Buybacks often shore up the price of a company's stock.
"We've spoken to a majority of our large shareholders, and today, like many of them, we see buying our shares as the most compelling use of capital," Parsons said during a conference call with Wall Street analysts, after the release of the company's third-quarter financial results. Time Warner stock closed yesterday at $17.90 a share, up 33 cents. Parsons said the stock buyback will be carried out over the next 21 months.
During a question-and-answer session with analysts, Parsons was asked repeatedly about the future of Dulles-based AOL. While confirming that Time Warner is talking to several companies about buying a minority stake in AOL, Parsons said it was possible that there would be no transaction.
America Online has been losing about 2 million subscribers annually, as dial-up users leave the service for faster or cheaper Internet connections. It lost 678,000 subscribers in the third quarter.
To counter the trend, the company has embarked on a strategy to increase its online audience by giving away music, news and entertainment on AOL.com and selling ads on the Web site. AOL also owns the AIM messaging service, Mapquest, MovieFone and other properties that give it an estimated 112 million monthly users.
In the third quarter, search-related ad revenue increased 38 percent. But revenue overall at AOL fell by $100 million, as the loss of dial-up subscribers more than offset the increase in ad sales.
"It's a priority for us to accelerate the transition to this audience-based business of our AOL business model," Parsons said. "It doesn't mean that we are going to give up the subscriber business."
Trends "are really favoring growth in online advertising," Parsons said.
Much of the third-quarter gain in ad revenue came from a partnership with Google, which is AOL's primary search engine. Google generates revenue for AOL by displaying ads alongside search results. Parsons said AOL was one of only four online companies that would have more than $1 billion in ad revenue this year.
Some analysts questioned the wisdom of selling a stake in AOL given the growth of online advertising. "It is unclear to us why it makes sense to sell a portion of AOL's equity at this point in time, especially if management believes it can make the advertising model work and perhaps dramatically increase the value of the business," wrote Katherine Styponias, an analyst with Prudential Equity Group.
Google's hyper-growth and skyrocketing stock -- which closed yesterday at $379.68 a share -- have given the seven-year-old company a stock market value of more than $110 billion, roughly $30 billion more than Time Warner's. Its momentum and its existing partnership with AOL make it more likely than Microsoft to buy a piece of the Internet service, according to a source who spoke on condition of anonymity, citing the confidential nature of the talks. On the other hand, Microsoft has more than $40 billion in cash and is eager for its MSN search engine to replace Google on the AOL service.
Parsons said Time Warner would prefer a "strategic" partner for AOL over a "financial" partner. By that, he said, he meant a partner that would accelerate the growth of AOL's audience and ad revenue the most, rather than one that would merely pay the highest price.
"We are trying to do things that create value for the long term," Parsons said. "You can always think of that as a prism through which to evaluate what we do."
In addition to America Online, Time Warner's media holdings include movie studios, HBO, CNN, Time Warner Cable and magazines, including People and Sports Illustrated.
For the third quarter, Time Warner reported a profit of $897 million (19 cents a share), up sharply from the $499 million (11 cents) it earned in the third quarter last year. Revenue rose 6 percent, to $10.5 billion.
The company said its profit increase was fueled by double-digit growth in its Time Warner cable channels and systems and by syndication of its popular "Sex and the City" program. More revenue came from its evolving Internet phone service.
"We are comfortably on track to have over a million residential phone customers by year's end," Parsons said.