Days of the Living Dead
Midtown Manhattan is haunted by ghosts. Old brick walls host faded ads for long-defunct haberdashers. Rockefeller Center, once Japanese-owned, still has a couple of Tokyo-style noodle bars. Most eerily, the skyline is punctuated by the Citigroup Center and Time Warner Center, which house vaunted banking and media conglomerates turned fallen angels turned phantasmagoric shells.
These ghosts linger. Tormented, Citi and Time Warner (TWX) torment us, demanding endless capital, McKinsey presentations, and countless man-hours of hand-wringing. Break them up, split them into pieces, exorcise these musty demons once and for all.
How many oceans of ink have been spilled on the year-2000 AOL-Time Warner merger? That paean to all things synergistic and eyeballsy quickly rang up a record net loss of $99 billion.
Inexplicably, AOL and Time Warner still are balance-sheet siblings, having together vaporized more than $200 billion in market value—and scores of careers—since the deal was inked. "AOL is a never-ending turnaround-and-restructuring story that has hurt morale across the entire organization," says Rich Greenfield, a media analyst with Pali Research. "It's a time-and-energy sinkhole."
And quite the shifty poltergeist. The dial-up business was a cash cow until the cow suddenly went dry. Broadband is the way forward! No, wait—build a walled garden of content for subscribers only. Actually, open it up as an ad-driven megaportal. Shoot—my bad: Give folks free AOL e-mail. Wait, see if private equity might buy it. D'oh!
All the while, Time Warner stock has plummeted 80%, according zero payoff to lucrative hits such as The Sopranos, Sex and the City, and the Harry Potter and Lord of the Rings franchises. Tens of billions in missed opportunity later, rookie CEO Jeff Bewkes now says he will entertain offers to buy AOL. Why, pray tell, did it have to take so long?
Perhaps not coincidentally, Dick Parsons, the CEO of AOL-Time Warner during its nowhere years, also sits on the board of Citigroup (C), a similarly cursed agglomeration. Born a decade ago as the world's financial supermarket, Citigroup has little to show for rolling up $170 billion in buyouts spanning everything from Associates First Capital to El Salvador's Banco Cuscatlán. The stock trades around where it did in 1998.
The past year should have sounded the death knell for all that. Racked by tens of billions in subprime losses, Citi surrendered $160 billion in market value, slashed its sacrosanct dividend, and went hat in hand to the Middle East and institutional investors to sell $40 billion of depressed equity, adding dilutive insult to shareholder injury.
Still, on Citi's long-awaited May 9 investor day, new CEO Vikram Pandit urged patience—much as the miscast Chuck Prince had before him.
Meredith Whitney, the Oppenheimer (OPY) analyst who correctly predicted that Citi would have to do the unthinkable and slash its dividend, doesn't buy it. She was miffed that Pandit rehashed an old Chuck Prince presentation from before the subprime meltdown, and even more so when Pandit couldn't come up with a dollar figure for Citi's deposit base.
For years, when its stock was much higher, portfolio manager Bill Smith of SAM Advisors urged Citi to break up and pay off its long-suffering stakeholders, to the tune of $70 a share. "Look," says Smith: "If you haven't pulled it off in 10 years, you're never going to pull it off. There's 40 quarters of data to prove it." In April, no less than John Reed, co-architect of the megamerger that created Citi, publicly regretted it.
Buy a beer or five for a Salomon Brothers (sorry, that's Citigroup Global Markets) banker. Witness how he longs to be desired by Goldman Sachs (GS) and paid in its stock. How he wishes his boss were Jamie Dimon, who 10 years ago was booted from Citigroup before ascending to the top job at JPMorgan Chase (JPM), where he just snapped up Bear Stearns. How, dejected, zombie-like, he checks his BlackBerry and shuffles back to work. And Wall Street's long national nightmare goes on.