AOL stock dips as feds widen probe
Advertiser News Services
NEW YORK — Jittery investors sent AOL Time Warner shares down more than 7 percent to $11.50 yesterday after the company confirmed that the Justice Department is investigating accounting practices at America Online.
Associated Press
"It's open-ended. Nobody knows what the Justice Department is doing," says Bear Stearns' Raymond Katz. "And Wall Street hates uncertainty."
AOL Time Warner headquarters in New York City remained busy yesterday as word spread that the Justice Department is also looking into accounting practices at the company.
Justice investigators in Virginia will work with the Securities and Exchange Commission, which launched its inquiry last week.
The investigations come after the Washington Post reported July 18 that the company's America Online Internet unit boosted sales by about $270 million from July 2000 through March 2002 by counting revenue from advertisements sold on behalf of EBay Inc. and through other "unconventional" transactions.
America Online Inc.'s advertising was booming in early 2000 when it agreed to buy Time Warner Inc., and executives said the Web service would fuel profits at the combined company. America Online has had declining ad sales for the past three quarters. Two weeks ago, chief operating officer Robert Pittman quit, just three months after being charged with reviving sales at the online unit.
"This is the end of a fiasco, and now the Time Warner guys need to get it back on track," said Blaylock & Partners LP analyst John Tinker, who has a "buy" rating on AOL Time Warner shares and owns some personally.
AOL tried to reassure the market, even as the company was narrowing its search for a new leader for the troubled online unit and as CEO Richard Parsons was in Boston at a previously scheduled meeting with mutual fund managers.
"In the current environment, when anyone raises a question about accounting, it's not surprising that the relevant government agencies will want to look into the facts," AOL said in a prepared statement. "We are cooperating 100 percent with the SEC, and we will cooperate with the Department of Justice as well."
But several analysts say they fear the investigation could broaden as officials subpoena and begin to pore over AOL records.
"You don't know how bad it can be," says Merrill Lynch's Jessica Reif Cohen. And Blaylock & Partners' John Tinker says practices "that were high-fived a few years ago mean orange-suit time now."
What's more, questions could linger even if investigators find no serious problems.
"They won't just walk away and give them a clean bill of health," says Christopher Bebel of Shepherd Smith & Bebel.
Meanwhile, AOL is in the home stretch to find a new chief for the online unit. The top candidate is Jon Miller, say people close to the situation. Until June, Miller, 45, was a top executive at Barry Diller's USA Interactive, whose holdings include travel agency Expedia, Home Shopping Network and Ticketmaster.
The deal could fall through, and AOL is still talking to other candidates, which have included Mike Klingensmith, who heads Sports Illustrated, and Disney theme park chief Paul Pressler.
A decision could be made within two weeks.
