AOL Time Warner: What the Shocker Means

Parsons' steady hand will be needed to navigate treacherous times

Shortly after AOL (AOL ) sealed its deal to buy Time Warner last January, CEO Gerald M. Levin quietly began discussing his succession plans with the board. There was little hint of it in public: If anything, the widely held expectation that Levin would stay on for years as the boss had grown in recent months as he and other executives from Time Warner appeared to be consolidating their control of the merged company. And, by most accounts, the new co-chief operating officer, Robert W. Pittman, 47, a founder of MTV and former disk jockey, would eventually get the nod when Levin left.

It didn't quite work out that way. In a surprise that shocked the media world, the 62-year-old Levin announced on Dec. 5 that he is stepping down. Equally surprising, Pittman wasn't elevated to the top spot. Instead, Levin ordered up a succession filled with as much potential intrigue as anything his Warner Bros. studio might put on the screen. Levin announced that the company would promote Richard D. Parsons, its 53-year-old co-chief operating officer, to CEO. Pittman's consolation prize: He'll fly solo as COO.

CALM WATERS. Clearly, Levin, AOL Chairman Stephen M. Case, and the board concluded that what the company needs most at the top is a steady hand, not a hotshot media pitchman. The choice of Parsons, a former lawyer and banker known for his courtly manner and diplomatic skills, may calm the waters at a time when AOL Time Warner Inc. faces shifting markets and huge new challenges. The phenomenal success of Warner Bros.' Harry Potter movie aside, pressures are rising in most every business: Ad sales are slumping everywhere, competition is rising for cable and Internet subscribers, and there's a growing face-off with software giant Microsoft Corp. (MSFT ) as the two titans battle to dominate consumer Internet markets.

But if Parsons is cut from a similar cloth as Levin, some changes are still likely. "Jerry was more strategic and cerebral," says Parsons, who oversaw the film, music, and book businesses. "I'm more of a management-by-wandering-around kind of guy. I'm going to make sure we've got the right kind of people in the right jobs."

By putting Parsons at the top and Pittman in line to succeed him, moreover, Levin achieved a powerful lineup that should also diminish the sparring between the two sides. Putting two AOL executives, Case and Pittman, at the top so soon surely would have brought deeper fissures between the Internet side and the entertainment and news sides of the empire. "There are an enormous number of different cultures floating around under the surface," says AOL board member Francis T. (Fay) Vincent Jr: "It will take hard work to make it work." Adds Storm Boswick, a fund manager at J.W. Seligman & Co.: "The choice had to be Dick."

"PUBLIC FIGURE." Outside the company, the task will be just as challenging. Much of Parsons' job in recent years has been to negotiate with regulators in Europe and Washington. That experience will come in handy if AOL wins its bid to expand its 13 million-subscriber cable franchise by acquiring AT&T's cable unit. "Dick clearly has a regulatory point of view," says Levin. "He's quite adept at dealmaking. He's made himself a public figure."

And what about Pittman? Some company insiders say that Levin has never been as simpatico with Pittman as he has with Parsons, who was hired in 1995 in part to help Levin articulate a clearer Time Warner message to Wall Street. He has also helped smooth over several internal disputes since then. And in a year on the job, insiders say, Pittman appears to have roiled some executives at former Time Warner units who were turned off by his hard-charging approach and overselling the merger's synergies.

Pittman may have also hurt himself on Wall Street with his outspoken hyping of AOL's extraordinarily aggressive financial targets for the merged company's first year. Even as the economy eroded and ad sales sank over the last 12 months, Pittman and other AOL Time Warner executives clung aggressively to the increasingly unachievable targets, before finally lowering earnings projections on Sept. 24. "I think a lot of investors were turned off by that," says Ajay Mehra, a portfolio manager at Columbia Management, which owns about two million AOL shares.

But Pittman isn't apologizing for those excesses--or anything else in his nearly two years with the Time Warner team. And he insists he's fully committed to his new job. "Dick and I have proven to be a good team and will continue to do so," says Pittman. "Other than the ego flap of not being named CEO, I am happy to continue as chief operating officer. Dick will be better in the CEO role than I would be, and I told Jerry and Steve that." What's more, he says, when Parsons decides to retire, he will, too. "My biggest CEO successes were at AOL and MTV," he adds.

Maybe, but don't count Pittman out just yet. One highly placed AOL insider says the current thinking is that Pittman needs more experience working with all the divisions before he ultimately takes over from Parsons. "It's a transition thing," says Alan Gerry of Granite Associates, which owns 30 million AOL shares. "Bob is younger than Dick, and his time will come."

But any expectation that AOL's management team would just run roughshod over the slower-moving Old Media execs at Time Warner has clearly proven off the mark. Parsons' elevation is just the latest bit of evidence that Levin's Time Warner underlings have grabbed the levers of power. Former Chief Financial Officer J. Michael Kelly was demoted back to the AOL division shortly after the company announced it would not make its targets. Turner Broadcasting CFO Wayne H. Pace replaced him. Moreover, the once red-hot AOL operations continue to struggle. "I think AOL is showing it's not all it was cracked up to be," says Mehra. "What is saving this company are Time Warner assets."

Then there's the mystery of Levin. He now says he knew when the merger closed that he would soon move on. And after 30 years with the company, he insists he has accomplished all he can in the business world. The events of September 11, moreover, reopened "the emotional wounds" of his son's tragic 1997 murder. Levin, who majored in biblical studies as an undergraduate at Haverford College, now says he wants to return to earlier interests. What path his future will take is still unclear. All that's certain is that AOL won't be a big part of it.

By Tom Lowry in New York, Catherine Yang in Washington, and Ronald Grover in Los Angeles

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