USA Today
NEW YORK — With the merger of America Online and Time Warner past the final regulatory hurdle — the Federal Communications Commission — chief executive officer Gerald Levin now faces one of Corporate America’s most daunting managerial challenges.
He must keep the No. 1 media and Internet company from becoming embroiled in internecine corporate warfare. That’s been a constant problem since Time and Warner combined in 1989. And some say the problem will bedevil Levin again as he moves from chairman and CEO of Time Warner to CEO of the combined company.
"You’re trying to meld a constantly changing culture to a closed culture," First Union Securities analyst Bishop Cheen said. "That’s a prescription for missteps. And it doesn’t take much to paralyze a company this large."
Levin can’t afford such turbulence. AOL and Time Warner shares have fallen 35 percent and 23 percent since the merger was announced on Jan. 10, 2000. To reassure Wall Street, Levin ambitiously vowed to boost AOL and Time Warner’s combined cash flow by 30 percent and find at least $1 billion in synergies in the first year of the merger.
Investors could punish the stock if he fails to deliver. That would probably light a fuse under erstwhile Levin allies, including vice chairman Ted Turner, who will own about 4.2 percent of AOL Time Warner’s stock.
Preventing turf fights "has got to be critically important" to Levin, Chase H&Q analyst Paul Noglows said. "Jerry’s been through it before, and he has shown that he doesn’t have any tolerance for warring fiefdoms."
Yet some fights are inevitable — and may involve him.
Levin will have to learn to share power with AOL chairman and CEO Steve Case, who will be chairman of the combined company. Both will report to a company board with equal representation from AOL and Time Warner.
And they now have co-chief operating officers — one from AOL, the other from Time Warner — looking for cross-divisional synergies. That means the days of cozy autonomy are over for the captains of far-flung operations in New York, Connecticut, Atlanta, Hollywood and Virginia.
Managers are already scrambling to protect their divisions from a new round of cost cutting. People from Time Warner are particularly nervous. They represent about 82 percent of AOL Time Warner’s expense base and expect to be hit hardest. Executives will announce as early as next week that several hundred positions will be cut from CNN. Other battles are sure to break out as executives adjust to each other’s personalities and agendas.
Rivals say it’s already hard to sort through the many conflicting interests at AOL Time Warner.
"It makes for a peculiar environment," said Howard Stringer, CEO of Sony of America. "We are arguing with Time Warner about our joint venture with Columbia House. At the same time, we’re talking about relationships with the movie studio on the Internet, and AOL is talking to (us about) Sony PlayStation."
Executives who get frustrated with the setup have little to lose by leaving. Their stock options vested when the deal was announced. And other companies may float attractive offers to lure them away.
"AOL Time Warner has some of the most impressive management talent in the business," said Booz-Allen & Hamilton’s Michael Wolf. "Any one of those executives could run an entire other company."
To retain them, the company will have to "give everyone opportunities to lead and to grow" as well as "a big piece of the upside through broad stock ownership."
For their part, AOL Time Warner’s leaders say they’re confident that their executives are mature enough to avoid egotistical squabbling.
"There’s been an unusual degree of community and camaraderie" in the months since the merger was announced, Chairman Case said. "I think you’ll find it’ll work remarkably well."
That will require integrating operations in ways that lead to a meeting of minds rather than a butting of heads. One of the brightest opportunities, or potential trouble spot, for example, is music distribution.
Everyone agrees that the Internet will soon become a major distribution pipeline for music sales. But something will have to give as AOL Time Warner tries to harmonize the digital distribution agendas of its online and recorded music operations.
AOL wants to offer downloadable hits that might attract new subscribers. It’s sure to want more releases from Warner Music, including exclusive access to tunes prior to their release in stores.
There may be something there for Warner Music, too. It could save as much as $68 million a year if AOL subscribers, acting as a test market, helped the company avoid releasing likely bombs, according to an analysis by Bernstein Research.
But Warner Music executives are apprehensive about digital downloads. They fear fans will get used to paying modest fees for just the songs they want, ending the practice of paying more for CDs that include other tunes.
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