Merger of Titans, Clash of Cultures


Steve Case, Jerry Levin, and the Collapse of AOL Time Warner

By Alec Klein Simon & Schuster -- 336pp -- $25.95

In late 2000, as the merger between America Online and Time Warner Inc. was nearing completion, AOL Senior Vice-President Neil Davis and three Time Warner executives met with Hasbro (HAS ) Inc. CEO Alan Hassenfeld to discuss online advertising. Davis warned Hassenfeld that if Hasbro failed to sign an AOL ad deal, it was ceding the opportunity to its flagging rival Mattel (MAT ) Inc. Abruptly plunging his steak knife into the table, Davis declared: "What we like to do to a competitor that is damaged is drive the knife in their heart." The Time Warnerites, representatives of a more button-downed corporate culture, were horrified and incensed. In the end, Hasbro decided against advertising on AOL.

Such stories abound in Alec Klein's Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner. This engaging account of the ill-fated 2001 merger of AOL and Time Warner -- the first of four books on the topic being published this year -- is at its best when depicting the antics of AOL's high-living, gunslinging dealmakers. After all, the author is the Washington Post reporter who last July broke the story about questionable AOL advertising deals that sparked an ongoing Securities & Exchange Commission investigation. But despite the colorful tales, Klein's book does not deliver much that's fresh -- not even on the SEC accounting inquiry. The author also fails to consider larger questions about the colossal stumbles in what was once billed as a transforming merger of the world's biggest online service with the Old Media giant.

Stealing Time gets off to a slow start, as Klein wends through the details of AOL's founding and the regulatory approvals needed for the merger. But the narrative picks up speed about halfway through, when Klein begins exploring the business practices of AOL chief dealmaker David M. Colburn, who was ousted last summer during the accounting scandal.

Colburn, who Klein says affected a grizzled, rumpled "I-don't-care-what-the-hell-you-think manner of dress," came to be feared in the dot-com world as a take-no-prisoners negotiator. He extracted onerous terms from fledgling Web startups, who felt they had to advertise on AOL if they were to have any credibility on Wall Street. Klein describes how, fat on these easy pickings, Colburn's gang whooped it up -- jetting to topless bars in San Francisco for ostensible team-building exercises and snorting cocaine in the open during a post-football-game traffic jam. It was an unapologetic macho culture, but, Klein observes, some employees justified it, saying it had "a socializing effect, a way of bonding AOLers, like the little mischievous boys of The Lord of the Flies."

When the dot-coms imploded not long after the AOL-Time Warner merger was announced in January, 2000, Colburn's team became even more aggressive. (In fact, an ad-revenue drop-off was already evident in late 1999, according to internal company documents, leading to the unusual deals that Klein first reported last summer.) In one instance, AOL agreed to purchase $250 million in computer hardware from Sun Microsystems (SUNW ) Inc. -- provided Sun bought $37.5 million in ads. In reality, Sun paid nothing for the advertising, instead giving AOL a credit for computer equipment. But AOL booked the $37.5 million as revenue. "It was fake money," Klein quotes an AOL official as saying. This case, it should be noted, has been widely cited, and no previously unreported ad deals are described in Stealing Time.

Klein is effective, however, in depicting the culture clash between the arrogant AOLers and staid Time Warnerites that ultimately rocked the merger. Ideas that AOL executives saw as forging synergies were repeatedly shot down by the Time Warner side, which seemed intent on demonstrating that it had its own way of doing things. What about using a set-top-box vendor who was a prospective AOL advertiser? No, said the Time Warner people; they had their own source. What about delivering the company's movies online? Time Warner said it was already working on that on its own.

The oil-and-water mismatch between the companies played out in the corner suites, too. Klein has little inside dope on what took place -- perhaps because his sources were mainly middle managers -- but he does recount the dramatic and rapid unraveling of the company's top management. Recriminations were common as AOL Time Warner's outlook deteriorated in the soft economy. Chairman Stephen M. Case -- along with Vice-Chairman Ted Turner -- wanted to oust CEO Gerald M. Levin. A particular point of friction was Levin's bid for AT&T (T ) cable unit, made without the involvement of Case, who opposed the move. Levin's December, 2001, resignation set off a chain reaction. Chief Operating Officer Robert W. Pittman, once the heir apparent, resigned after his co-COO, Richard D. Parsons, was named CEO. Then, pressured by unhappy shareholders, Case resigned in 2003.

Corporate theatrics of this scale beg for more analysis than Klein gives us -- leaving room for the forthcoming books to pick up the slack. Was the merger folly to begin with? Did it fail just because it was mismanaged? Or was it the ultimate dot-com con? Surely, this bungled marriage of gargantuan corporate egos -- against the powerful backdrop of the Internet bust -- offers some lessons about hubris, overreaching, and human frailty. But Klein shies away from any such deductions. Stealing Time is juicy, but there's little food for thought.

By Catherine Yang

    Before it's here, it's on the Bloomberg Terminal.