Time Warner Inc. has abandoned plans to sell a minority stake in America Online Inc. but remains in active negotiations with rival suitors Google Inc. and Microsoft Corp. about forging a more limited partnership with one of them to increase online ad revenue for AOL.
Time Warner officials yesterday were in separate talks with the parties that would either expand on Dulles-based AOL's existing ad and search partnership with Google or replace it with a new broad-based alliance with Microsoft, according to people who spoke on condition of anonymity because of the confidential nature of the negotiations. Whatever the outcome, Time Warner's goal is to position America Online to grab a bigger share of the lucrative and rapidly growing online ad market.
The talks are taking place against the backdrop of enormous pressure on Time Warner chief executive Richard D. Parsons from corporate financier Carl C. Icahn, who leads a group that has purchased a stake of about 3 percent in the media giant and vowed to wage a proxy fight to replace management and the board. While Icahn argues that Time Warner shareholders would benefit from a breakup of the company and a sale of its far-flung media businesses, Parsons has taken the position that stockholders will benefit most from keeping the firm intact and pursuing a growth strategy.
In an interview yesterday, Icahn said he was pleased that Time Warner had decided not to sell a minority stake in America Online since it left open the possibility of pursuing other transactions involving AOL later that would deliver more value to stockholders. Icahn -- who has hired the investment firm Lazard Freres & Co. to analyze how much money shareholders would reap through the sale of Time Warner's media businesses -- said any advertising partnership involving AOL should be structured carefully so it does not prevent the sale of the business in the future.
"The only thing that really worries me is that they make an ill-conceived deal as a defensive tactic," Icahn said. "If that happens, we would hold the board and Parsons personally responsible for standing in the way of truly enhancing value by diminishing the value of AOL."
While declining to comment on Time Warner's talks regarding AOL, the company's chief spokesman, Edward I. Adler, defended Parsons's track record and vision for the corporation. And he made it clear that the Time Warner chief and Icahn have totally different perspectives on what is best for the company that owns HBO, Warner Bros. Studios, People magazine and vast cable television operations in addition to AOL.
"We believe there is strength in having the assets of Time Warner under one roof," Adler said.
Nell Minow, a corporate watchdog and executive director of the Corporate Library, said Time Warner has been doing a good job of reaching out to shareholders to communicate its strategy. Minow said the spotlight on Time Warner from Icahn's "agitating" undoubtedly would influence the outcome of talks regarding expanded ad dollars for AOL through a new alliance with Microsoft or Google.
"The advertising thing they are pursuing shows they are thinking creatively about their future," Minow said of Time Warner. "They do have a strong board and very strong CEO, and I am not at all persuaded that Carl Icahn's proposal is the best thing for that company."
Under the broad framework of the deal being discussed between Microsoft and Time Warner, America Online would dump Google as the Internet search engine on its service and replace it with MSN Search next year. That would be a blow to Google because it gets tremendous brand exposure and more than 10 percent of its revenue from ads that appear on America Online's flagship service, the AOL.com Web site, and other AOL properties, including Moviefone and Mapquest.
Under that scenario, Microsoft and America Online would also combine ad sales so that advertisers could make a single purchase and appear across the AOL and MSN networks. An Internet partnership between AOL and Microsoft would create a more viable competitor to take on Google and Yahoo, the two leaders in Internet search and online advertising.
Alternatively, AOL, which has a strong relationship with Google, would expand upon that by finding ways for Google to send more computer users to AOL Web sites. That would likely be done by giving AOL discounts on the purchase of ads on Google, the leading search engine. AOL also wants its video search business to be offered on the Google service so it can grow more rapidly. And AOL wants the right to sell all ads on its service, including those provided by Google. Under the current arrangement, AOL keeps about 80 percent of the revenue from ads provided by Google on its network of Web sites.
Microsoft, Google and Time Warner all declined to comment on the talks. Analysts said they were not surprised that nobody wanted to buy a minority stake in AOL for the billions of dollars that Time Warner was seeking. Time Warner had placed a total value on AOL of $20 billion. Google had been considering the purchase of a 10 percent stake in AOL for about $2 billion before the talks shifted gear, people familiar with the discussions said.
"Microsoft is saying to AOL, 'We can team up and take on Google and Yahoo,' " said Scott Kessler, an analyst with Standard & Poor's Corp. "An AOL-Microsoft alliance could adversely impact Google. . . . Everyone is telling me this is going to be resolved before Christmas."