Can Dick Parsons Rescue AOL Time Warner?
Richard Dean Parsons' career to this point is a story of great promise fulfilled. He emerged from the mean streets of Bedford-Stuyvesant to post the highest score among all 3,600 law school grads who took the New York state bar exam in 1971. While still in his 20s, Parsons was an Afro-topped adviser to New York Governor Nelson Rockefeller and to President Gerald Ford. After a dozen years with an elite Manhattan law firm, the prodigy recast himself as a banker in time to save New York's largest savings banks from ruin. Next, he entered the media business, surviving years of fierce internecine warfare to become chief executive of AOL Time Warner Inc. (AOL ) in 2002. Parsons, 55, will add the chairman's title at the annual meeting on May 16, capping his serpentine rise to the business world's pinnacle.
The quiet pride Parsons takes in his accomplishments is tempered by the enormous challenge he now confronts. He assumes sole command of a company born of the worst deal in the history of misbegotten megamergers. In January, 2000, at the peak of dot-com mania, patrician media giant Time Warner Inc. agreed to be acquired by Internet upstart America Online Inc. in a stock swap priced at $284 billion. Today, the stock market values AOL Time Warner at $61 billion. That's right: $223 billion in shareholder wealth, vanished. "They gave away their company for a mess of porridge, and they've got to live with that forever," says Rupert Murdoch, chairman of rival News Corp. (NEWS )
In Parson's considered view, AOL Time Warner does not need radical surgery. The company's stock collapsed, but its business did not. To the contrary, operating cash flow generated by the likes of Warner Bros. (AOL ), Time, and Turner Broadcasting System (AOL ) rose to $7 billion in 2002 from $1.9 billion in 2000. Parsons is methodically trying to rebuild AOL Time Warner's shattered credibility on Wall Street by stressing incremental growth, cost control, debt reduction, and other lapsed fundamentals. Strategically, he has set a middle course. To pare down the company's $27 billion debt, the CEO has put "noncore" assets such as book publishing and CD manufacturing up for sale. Yet he resists calls to divest the flagging online division and excise the letters A-O-L from the corporate name.
"There's no magic in what we're doing. The days of magic are over," says Parsons, who also is grappling with investigations into America Online's premerger accounting by both the Securities & Exchange Commission and the Justice Dept. "But for the first time since the merger, this company is poised to surprise on the upside."
AOL Time Warner did modestly exceed expectations in its Apr. 28 report of a 9% gain in first-quarter operating income, to $1.2 billion, on a 6% increase in revenue, to $10 billion. But a week later, one of the company's directors, Ted Turner, undercut Parson's message of guarded optimism by reducing his holdings in AOL Time Warner by half, divesting some 60 million shares. The good news for Parsons is that AOL's stock proved remarkably resilient, barely budging on the news of Turner's massive sell-off. On the other hand, the company's stock is trading at about $13 a share, down from $20 when Parsons officially took charge last May. The immediate fate of America's most underachieving media giant now turns on this question: Does Dick Parsons have what it takes to salvage real value from Time Warner's train wreck of a merger?
Parsons inspires extravagant admiration among close colleagues past and present. If anyone can rescue AOL Time Warner, they say, Parsons can; just give him time. He is likely to get another year or two at a minimum, for he has impressed the people who count most: AOL Time Warner's board members and many of its largest shareholders. "Dick is the right guy to be running the company right now," says Gordon Crawford, senior vice-president at Capital Research & Management Co., AOL's largest shareholder, with a 7% stake.
But outside of the elite circles in which Parsons has moved ever since law school, he remains a largely unknown quantity. Despite his gilt-edged résumé -- or perhaps because of it -- he looks from a distance like an accidental media mogul. Skeptics say the genial chief executive is just a well-connected corporate diplomat, a schmoozy pol in pinstripes. Parsons is seen by some as a media-industry outsider who was just lucky to be the last man standing after the self-styled visionaries who made the merger -- former Time Warner CEO Gerald M. Levin and former American Online CEO Stephen M. Case -- self-destructed.
There was destruction aplenty, but this point of view gives Parsons too little credit. If he did not conspire to seize power, neither did he just sit back and let it fall into his lap. It might well turn out that reviving AOL Time Warner requires measures more drastic than Parsons is now taking. Dumping the online unit leaps to mind. But the unvarnished story of how he ended up in the corner office -- told here for the first time in print -- strongly suggests that if Parsons fails in his reclamation mission, it will not be for lack of grit or guile.
"Dick is a nice guy, but if that's all he was, he'd already be in the library under 'History,"' says John O. Utendahl, a Wall Street investment banker and a close friend. "Dick shows you what he wants you to see, and the part of him you don't often see is his assertive, unwavering killer instinct. People like to say that they play to win, but that's not the statement for Dick. I'd put it like this: There's nothing else on Dick's mind but winning."
It is generally thought that when Levin announced his resignation as CEO in late 2001, he was bowing to pressure from the board. There was pressure all right, but BusinessWeek has learned that it was applied by only one director -- Chairman Steve Case -- who irreparably damaged his own stature even as he hastened Levin's departure. Case mounted a one-man attempted coup, telephoning each director one by one to argue that Levin should be removed as CEO. Parsons, then co-chief operating officer, joined several outraged board members in standing up for Levin and making Case back down. "A number of us were absolutely opposed to the idea that the CEO could be fired on the telephone," says Stephen F. Bollenbach, chairman and CEO of Hilton Hotels (HLT ) Corp. and a longtime Time Warner director. Case declined to comment on board matters.
Having dodged what another director termed "an assassination attempt," Levin, 62, decided to step down anyway in May, 2002, in favor of his chosen successor, Dick Parsons. The new CEO did not do to Case what Case had tried to do to Levin. But Parsons did firmly nudge the chairman toward the exit, with an assist from several shareholders who favored less gentle means. A second board battle was deftly avoided when Case announced in January that he was stepping down as chairman. "If it was just about tenacity," Case said, "I will assure you I would continue to fight on."
Parsons declines to comment about Case's showdown with Levin or his own private dealings with the ex-chairman. But AOL Time Warner's self-effacing new boss can't resist a little chest-thumping. "Surviving is winning, because if you are the last man standing, as they say, then you are the last man standing," Parsons says. "There is a certain amount of luck involved in anything in life. But I never had a doubt about how this would all work out."
It's a lovely sunny afternoon in April, and Parsons is sitting in his office talking bemusedly to his BlackBerry, trying to get it to behave. It's a one-sided conversation, to be sure, but Parsons persists. He talks to absolutely everyone, so why not try to reason with this inanimate lump of digital circuitry he holds in his massive hands?
When AOL Time Warner replaced Levin with Parsons, its leadership moved from one end of the personality spectrum to the other. The famously uptight Levin exuded an almost Nixonian aura of suspicion and social unease. When Levin appeared without a tie at the press conference announcing the big merger, the effect could not have been more disconcertingly incongruous had he forgotten his pants instead. But when Parsons removes his tie, he means business. Time Warner's movie and music divisions throw a lot of first-class parties, and Parsons goes to as many of them as he can. Last August, he flew all the way to Barcelona for a big record industry bash. "Dick was still dancing when I left at 6 in the morning," recalls Roger Ames, chairman and CEO of Warner Music Group (AOL ) "Yet he was there when the plane left at 7."
Parsons did paperwork much of the way back to New York, while Ames dozed next to him. Parsons, like Levin before him, puts in punishingly long hours. Yet he wears his diligence lightly. He is paid to be serious, but his default mode is loose and playful, with a touch of hipster diffidence. "This guy is a cool cat, and he's always been a cool cat," says Harry F. Albright Jr., a retired banker who has known Parsons since both worked for Nelson Rockefeller in the early 1970s. "He would just say what he thought, very calm and poised. There was no apple-polishing, no flattering the Governor. Nelson trusted Richard big time."
Parsons is a man of prodigious accomplishment and massive physical presence -- he's a broad-shouldered, deep-voiced 6-foot-4 -- who nonetheless has been underestimated throughout his career. Is racism to blame? To a degree, no doubt, but it is also the result of his own effort. In the way that some folks labor to smooth their rough edges, Parsons has endeavored to shrink himself to better disarm foes and rivals. "Richard's ability to get people to underestimate him is a great skill," says Alberto Cribiore, a New York financier and a friend of Parsons' since they were next-door neighbors in the mid-1970s. "If you are obvious, they know where to hit you. Who wins between the bull and the matador?"
Although Parsons is now the leader of one of the best-known companies in the land, he's still working the modesty thing pretty hard. "If someone stops me on the street or at a cocktail party or something like that and says: 'Well, what do you do?' I don't know what to say," Parsons says. "I always used to say: 'I'm a lawyer,' because that's what I was." Why doesn't he just identify himself as CEO of Time Warner? "I'm not yet fully comfortable with a new definition of who I am, professionally," replies Parsons, who has not practiced law since leaving Patterson, Belknap Webb & Tyler in 1988.
Yet Parsons also says he never would have joined Time Warner in 1995 had he not believed that one day, he would be its CEO. Parsons, who was chairman and CEO of Dime Savings Bank of New York at the time, had been a Time Warner director since 1991. But no one, not even his colleagues on the board, saw him as Levin's eventual successor. Although Parsons started as Time Warner's president, Levin allowed his new No. 2 no authority over the operating divisions and made no promises about the future. Succession was not discussed. Press reports theorized that Levin had chosen a weak president so as not to antagonize his cantankerous division chiefs. "I was a cajoler," Parsons recalls. "It was awkward until I established a basis for a personal relationship with the divisions."
Parsons gradually made himself indispensable to Time Warner by taking on tough assignments that the increasingly insular Levin could not or would not do himself. "Whenever we had a problem with one of the other units, Parsons was always the guy who would solve it," says Robert Daly, the longtime former co-chairman of Warner Bros. film studio. "And he would do it in a way that everyone would feel good about the outcome."
In filling the void left by Levin, Parsons aggrandized his own position even as he remained scrupulously loyal to the boss. "He never once overstepped his bounds as the No. 2," says Richard J. Bressler, a former Time Warner chief financial officer. Had Parsons shown less deference, might he have talked Levin out of making his worst mistake as CEO? Probably not. Combining with AOL was Levin's idea, but Parsons admits he was all for it. "I thought it would be good for both companies," he says. Even so, Parson's disciplined subservience to Levin would later work to his advantage in limiting his personal culpability for the merger from hell.
For tax and accounting reasons, the $284 billion transaction was structured as an acquisition of Time Warner by AOL but was intended to be a merger of equals. The new company's 16-person board was evenly divided between former directors of AOL and of Time Warner, and responsibility for the operating divisions was split between co-Chief Operating Officers -- Parsons and Robert W. Pittman, 47, AOL 's smooth but hard-driving president. The CEO job was not shared; it went solely to Levin. Case, 41, settled for chairman. "One of the catalysts of the merger from our end was that Steve wanted to back off from the business and not be a CEO any more," recalls a former AOL executive. "He wanted out, but with a little 'o."' Case was not willing to be a figurehead. The merger agreement contained an unusually explicit description of Case's prerogatives as an "active chairman."
It quickly became apparent that, in practice, the notion of a merger of equals meant one thing to AOL's line managers and something quite different to Time Warner's. To the techno true believers who ran AOL, the content produced by Time Warner's cable TV, publishing, movie, and music groups was Old Media fodder for AOL's ever-widening Internet pipeline. But to the Time Warner crew, the Net was not a new universe but merely a new market that, if carefully exploited, could accelerate the growth of established media businesses. The conflicts inherent in these opposing world views were exacerbated by two forms of institutional arrogance: AOL 's messianic pushiness and Time Warner's Establishment intractability. The result was a standoff. It wasn't so much that the company's pursuit of synergy between old and new media failed as that it never really began.
Despite the mounting strife in the ranks beneath them, Parsons and Pittman got along surprisingly well as co-COOs. Neither was inclined to meddle in the other's affairs, and when operational overlaps did cause conflicts, they sorted them out in private. "We did have substantive disagreements, but very few of them were ever visible to anybody else," Parsons says. "If we got a Thoroughbred in the AOL merger, it was Bob." Pittman declined to be quoted.
Nor was there overt conflict between Levin and Case, but that was only because they hardly interacted at all. Case worked mainly out of AOL's offices in Dulles, Va., rarely putting in an appearance at the New York City headquarters. "I knew that offering Jerry the CEO position would lessen my authority, but I thought it was the right thing to do...," says Case. "In retrospect, perhaps it would have been better for me to have a larger role."
As 2001 wore on, it seemed to Case that Levin was so fixated on meeting the company's ambitious quarterly earnings projections that he had forgotten about the cross-company initiatives that were the reason for merging in the first place. By all accounts, the events of September 11 sent Levin into an emotional tailspin that caused him to withdraw even further into his self-imposed isolation. "After 9/11, Jerry basically just gave Steve the finger," says a former company executive. Levin did not respond to a request for an interview.
Case mounted his failed coup attempt in mid-November. Says one well-placed insider: "Steve made the mistake of thinking that silence on the other end of the telephone was approval, when it was just silence." At least two directors -- Reuben Mark, the chairman and CEO of Colgate-Palmolive (CL ) Co., and Francis T. "Fay" Vincent Jr., the former commissioner of Major League Baseball -- went ballistic. "There was," Vincent acknowledges, "a hell of a fight."
Parsons retreated to his apartment in Manhattan's Tribeca neighborhood on the weekend of Dec. 1 to ponder a course of action. Just a few weeks earlier, Levin had finally acknowledged Parsons as his heir apparent. Parsons had let it be known that he was seriously considering an offer from Philip Morris Cos., which was looking for a new CEO. Pittman, whom many outsiders considered AOL Time Warner's heir apparent, told Levin that he wasn't interested in the job and that losing Parsons would be a disaster -- a message repeated by several key directors.
Sources close to Parsons say that he awoke on Sunday morning knowing what he had to do. Parsons called Case and said he would use whatever influence he had to oppose him in his bid to oust Levin. In conversations with friends and advisers, Parsons framed his decision in moral terms, as an assertion of loyalty and a belief in corporate due process. But it also was in his self-interest, since Levin's ouster could have given AOL the upper hand in the company's civil war. Parsons still might have emerged as the next chief, but his head could just as easily be the next one on Case's chopping block.
After Parsons was named CEO, he asked Pittman to stay on as sole COO. In April, 2002, a month before Levin's official departure, Parsons asked Pittman to go down to Dulles and figure out how to fix the online division, which by now was afflicted by plunging advertising and e-commerce revenues. Pittman reluctantly agreed to the special assignment but soon was so exhausted that he nearly had to be hospitalized. He resigned after the July 4 holiday. "Bob was completely burned out," says one confidante. "He just hit a wall."
Much as he liked Pittman, Parsons was not unhappy to see him go, because he could now complete Time Warner's managerial takeover of America Online. In effect, he filled the co-COO posts that he and Pittman had recently vacated by promoting two of Time Warner's most respected division chiefs: Don Logan, 59, CEO of the Time Inc. magazine group; and Jeffrey L. Bewkes, 50, CEO of Home Box Office. Parsons describes these simultaneous appointments "as the most important move I have made as CEO."
AOL was assigned to Logan, who purged the division of its most obstreperous champions of e-supremacy, including such notorious "Pittman panzers" as David M. Colburn, head of new business development, and Meyer Berlow, AOL's advertising chief. In August, Logan got Parsons' O.K. to bring in an outsider to head the division -- Jonathan Miller, 45, a consumer marketer who had run USA Interactive's e-commerce group.
But even as Parsons was consolidating his operational control in the latter half of 2002, his relations with Case were fraying. After Levin stepped down, Case took on added prominence as the co-head of a new strategy committee of the board. Even as AOL's accounting was coming under suspicion, he began an ill-timed campaign to raise his public profile, giving speeches in which he reaffirmed his faith in the Internet's golden promise.
In September, 2002, AOL Time Warner issued a curious statement describing Case as Parsons' "primary thought partner and sounding board" but pointing out that "Dick ultimately is responsible for managing the company." Explains Parsons: "There was concern over the increasing drumbeat of 'who's in charge here?' Was Steve running the company? Is nobody running the company? What we were trying to move people toward was the realization that the CEO was running this company, like in most companies."
Case had challenged Levin's authority but did not make the same mistake with his successor. "I thought it was best that I step down as chairman so people could move beyond finger-pointing about the past," says Case, who did not consult the CEO before he announced his resignation in January. Just two weeks later, Ted Turner announced plans to step down as vice-chairman. The board considered replacing Case with a nonexecutive chairman but unanimously decided to go with Parsons in the end. "To bring in another player at the top would have been awkward," one director says. "We'd had enough trouble already."
Parsons might have been a media industry neophyte when he came to Time Warner, but at Dime Savings, he had already weathered a crisis more dire than most CEOs ever face. After taking over as chief in 1990, he rescued New York's largest savings bank from the brink of insolvency, keeping federal thrift regulators at bay as he overhauled the stodgy institution from top to bottom. "Looked at objectively, the chances of the Dime surviving were small," says Douglas E. Barzelay, its general counsel under Parsons.
Parsons scoffs at the notion that he saved the Dime Savings Bank by pulling strings in Washington. "What was helpful was that having been effectively a bureaucrat myself, I could understand where the regulators were coming from and what we needed to do to get to where we needed to get," says Parsons, who spent three years in Washington as deputy counsel to Vice-President Rockefeller and as a domestic policy adviser to President Ford.
Now, Parsons is struggling to apply this hard-won wisdom to his dealings with the SEC and federal prosecutors in Virginia. In June, 2002, the SEC alleged that AOL had inflated its premerger revenues through circular transactions with certain of its advertising and e-commerce clients -- a practice known as "round-tripping." Parsons mistakenly proclaimed his company's innocence before Chief Financial Officer Wayne H. Pace had completed an internal investigation. In August, AOL Time Warner made the embarrassing disclosure that it had uncovered suspect transactions totaling $49 million. In October, Parsons disavowed an additional $190 million of revenue.
AOL Time Warner is in discussions with the SEC and with prosecutors, but a settlement does not appear imminent. For one thing, the SEC in March began pressuring the company to restate an additional $400 million in online advertising revenues tied to AOL Time Warner's $6.7 billion purchase of Bertelsmann's 50% interest in AOL Europe. As part of this deal, which was negotiated before the merger closed but was implemented when Levin was CEO, AOL agreed to pay Bertelsmann in cash if the Germans bought $400 million in online advertising. The SEC contends that AOL should have recorded the $400 million not as revenue but as a reduction in the purchase price. The company and its auditors, Ernst & Young, strongly disagree.
Dime Savings Bank's survival hinged on Parsons' dealings with the feds; AOL Time Warner's does not. Some shareholders worry that Parsons is indulging his lawyerly side by spending too much time battling over accounting arcana. "Why not say to Washington: 'What do you want? We'll give it to you,"' says Mario J. Gabelli of Gabelli Asset Management Co. "Why fight over something you inherited?"
The cloud over AOL's accounting has forced Parsons to delay an initial public offering of shares in Time Warner Cable (AOL ) that had been scheduled for the second quarter. Expected to raise at least $2 billion, the IPO is the largest component of Parsons' plan to pay down total debt from the current $27 billion to $15.75 billion-to-$20 billion by the end of 2004 (table).
Parsons has no choice but to get debt down, but this is hardly Dime Savings revisited. The company retains an investment-grade credit rating of BBB and throws off huge sums of cash. In 2002, every one of its divisions except AOL posted an increase in earnings before interest, taxes, depreciation, and amortization (EBITDA). At AOL, EBITDA plunged 44% last year and continued its swoon in the first quarter as the number of subscribers worldwide fell by 342,000, to 32.5 million. Under Logan and Miller, the AOL division is trying to reverse its decline by shifting emphasis from dial-up to broadband access and by trying to develop new "must have" proprietary programming. "If we are wrong about broadband, then we have to rethink it," Parsons says. "But given what we believe now, I think AOL fits."
There are shareholders who think Parsons is just postponing the inevitable funeral. "It doesn't take a team of McKinsey consultants to realize that AOL is a dying business," says a portfolio manager who has been selling Time Warner shares. Even if he is right, Parsons simply cannot afford to divest the online division as long as Time Warner remains in urgent debt-reduction mode. AOL may be a dwindling asset, but the division still generated $1.5 billion in EBITDA last year, and Merrill Lynch (MER ) & Co. predicts only a slight decline, to $1.4 billion, for 2003.
While Parson's down-the-middle approach has yet to significantly alter AOL Time Warner's income statement or its balance sheet, he already has brought a measure of order and harmony to a chronically divisive company. Parsons meets every Monday morning for a wide-ranging breakfast discussion with Logan, Bewkes, and Pace. "I am not Moses come down from the mountain with the stone tablets. It's a collaboration," Parsons says. "Getting your team together is the most important thing."
Even some of Parsons' admirers wonder whether he will be more than a transitional CEO. If Parsons succeeds in getting the company squared away over the next few years, they say, AOL Time Warner might be better off reverting to a visionary type of CEO to spur the growth of what is essentially a portfolio of mature businesses. "I'm not sure Dick's the guy to be running this company over the long run," says one investor. "But who knows? He may develop a vision as he goes on." He might, and he might also decide that life is too short to spend a whole lot more of it at AOL Time Warner. "I take this job seriously. It's important that I do it well, because a lot of people are counting on me," Parsons says. "But it's not my life. I exist apart from this job."
Since leaving Washington in 1977, Parsons has turned down job offers from several Republican Presidents, including the current one. He might just say yes the next time, or even run for high elective office in New York, as friends have been urging him to do for years. And then there is the winery that Parsons and his wife bought two years ago in Italy, near the Tuscan hill town of Montalcino. Parsons has decorated the label of his Il Palazzone wine with a mock Parsons family crest and is thinking of adding this motto: "We drink all we can and we sell the rest." Parsons will drink his share of wine no matter what. But the events of the next year or two will go a long way in determining whether he is celebrating AOL's revival or drowning his sorrows.
By Anthony Bianco & Tom Lowry