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Shuck AOL? Not So Fast

When AOL Time Warner announced on Sept. 18 that it would eject "AOL" from its corporate name, a new chapter opened in the rocky merger launched in 2000 between the online service and the media giant. Indeed, the news fueled speculation that this symbolic move sets the stage for a grand finale to the long-running saga of a merger gone sour: Splitsville.

The notion of Time Warner unloading AOL is certainly intriguing to some wags. After all, the once and now-again Time Warner will drop "AOL

" as its ticker in favor of Time Warner's original "TWX." And the merger has been nothing but trouble for Time Warner stock. On January 10, 2000 -- the day the merger was announced -- Time Warner was trading at $90.19. On Sept. 23, the combined company's stock closed at $16.23 - an 80% loss in shareholder value. It wouldn't take much more to make the separation complete - and permanent -- by selling off the AOL unit.

The wags would be too hasty, however. Even if Time Warner execs wanted to offload the weakest link among their divisions (and they're not saying, or even signaling, anything), who would buy AOL in the shape it's in today? Saddled with debt and a pending U.S. Securities & Exchange Commission investigation into its accounting practices, AOL comes laden with potential liabilities approaching billions of dollars. It would take an exceptionally love-struck suitor to link up with that kind of ball and chain.

TAKE MY DEBT, PLEASE. The merged company is all too aware of the obstacles those liabilities pose. After he took over as CEO of AOL Time Warner last May, Richard Parsons found nearly $30 billion of debt on the balance sheet. Of that, one-third is associated with AOL -- much of it due to the buyback over the last two years of AOL Europe.

Parsons since has paid down $5 billion of the overall debt to stave off a downgrading of its credit rating. But, still laboring under a considerable total debt load, execs probably wouldn't agree to any sale unless AOL's buyer agrees to assume the online service's still-substantial debt.

Even then, the SEC investigation continues to loom. One year into its inquiry, the agency has yet to publicly assess the scope of AOL's alleged wrongdoing. Lawyers close to AOL anticipate that SEC could take another full year to resolve the matter, because the feds are unwilling to leave any stone unturned for fear of letting a major violation go unchecked. AOL has already restated $190 million of revenues and is awaiting word of a final tally from the SEC for potential new accounting restatements.

UNPLEASANT REMINDER. Also, two execs of a defunct Las Vegas software company are now cooperating in the SEC probe after pleading guilty on Sept. 23 to an alleged scheme to inflate their revenues through deals with AOL, and AOL has agreed to settle Federal Trade Commission charges that it treated some subscribers unfairly on rebate offers.

Meanwhile, 30 private shareholder lawsuits have piled up in anticipation of easy winnings on the feds' coattails. AOL no doubt will have to pay many billions of dollars to settle both federal and private claims in the end. Though AOL will be long gone from its parent's name by then, Time Warner execs will likely have a mountain of bills as a reminder.

If in a year's time the SEC investigation and private suits are settled and AOL's debt shrinks, don't be surprised if bright-eyed suitors -- such as Interactive Corp. (IACIW) Chairman Barry Diller -- turn up on Time Warner's doorstep. Then it might be another Internet hopeful's turn to try finding the treasures buried in the beleaguered online service that once headlined a major media company. But that day is still a long way off. By Cathy Yang in Washington

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