Storming the Castle
A long time ago, in a galaxy far, far away, an unlikely prince was anointed to bring peace to the kingdom, a kingdom so vast there are some who believe it touches everything we see, feel and think. It was Richard the Good’s blessing to be loved, as it was his curse. And so it was that the Council of Lords believed he could bring peace to the land, which was under siege from high officials with malice in their eyes representing agencies of justice, securities and finance ,as well as the Lerachians, odd looking, fuzzy-haired creatures intent on plundering $200 billion of the kingdom’s riches. Nor was life placid inside the mother ship, which was rent by a recent conquest. The $183 billion merger between AOL and Time Warner in 2000 had rapidly gained notoriety as one of the worst in the history of the galaxy. High ministers of finance constantly beat on King Richard’s door demanding he sign all types of notes and documents, including Sarbanes-Oxley requirements, lest they cut off the money needed to run his kingdom and care for his people. His wise counsel advised him he absolutely could not sign the documents, and he was faced with the very real prospect that his first official act would be to declare the bankruptcy of the kingdom. “It was like having an ocean liner hit an iceberg, and it has a hole in the bottom of the boat. You can’t worry about what they’re serving in the dining room and whether the tennis court is getting properly rolled,” Richard Parsons tells a standing-room only class of Harvard law and business students. “The first thing you have to do is fix the hole in the boat.” If anyone deserved a peaceable and placid reign, it was Parsons, who became CEO of the Time Warner kingdom in 2002 and chairman of the board a year later. But then we would not have this story. Tonight’s class was assembled by Bob Clark, one of the Lords of the board, who has brought together the leading warriors of the most recent battle for the kingdom. Clark suggests the bloody battle be referred to as an “interaction” between Messrs. Parsons and Bruce Wasserstein, in the form of Carl Icahn, rather than the more contentious “struggle.” In either event, the Time Warner battle has become a symbol of the new era of subtlety in shareholder activism and specifically, the role of provocateurs. In the first three years of Parson’s reign, he managed by near-death experience, settling administrative investigations and lawsuits and building a fortress of a balance sheet. No longer taking on water, the company announced a $5.5 billion shareholder buyback program. The share repurchase essentially was an investment by Time Warner in itself, using cash to buy its own shares. By reducing the outstanding shares of the company, the shares of existing investors would gain in value because there would be fewer claimants on the behemoth’s earnings. Despite the $5.5 billion bid, the sleeping maiden that Time Warner’s stock price had become, did not stir. Enter Icahn, a very smart man with a very big mouth who, with a group of hedge funds, acquired roughly 3-1/2 percent of the company and 100 percent of the media headlines. There is grave, grave mismanagement in the kingdom, which is being run by incompetents, he bellowed. And so it came to pass that Richard the Good mounted his steed to visit Mr. Icahn across yon river. The raider who roared suggested Time Warner completely spin off its massive cable properties and conduct a $20 billion shareholder buyback via Dutch auction. Parsons explains that the company was already spinning off cable, taking part of it public. But he also suggests in his most diplomatic way – which you must understand is very, very diplomatic, that of a samurai saddled with responsibility for the world’s biggest media empire – that, “having been there longer,” he thought a relationship between content and distribution might exist. They promised to stay in touch and Richard departed, mounting his trusty steed to travel to the kingdom’s 15 largest shareholders, who owned more than 50 percent of the stock. The powerful shareholders agreed the kingdom was undervalued, but they did not support spinning off all of cable. As long-term shareholders, they also saw nothing good in the Dutch auction on which Icahn insisted. It would offer a premium of $3.50 to a limited number of shareholders who, like him, bought shares at $17.50. Those who came in at a higher price, which is to say almost everyone, saw little value in a premium payback to eliminate a few nasty headlines. Within weeks, Parsons bolsters that position with the financial results of a recent quarter, showing the kingdom is continuing to mint cash, leading it to increase to $12.5 billion the amount of stock it will buy back. Icahn responded with a report authored by Lazard, which had agreed to represent Icahn in the battle so long as it could make its own decisions and recommendations. In agreeing to represent Icahn, whom he had turned down twice before, Wasserstein focused his criticism on Time Warner’s board. He saw the group as devoid of a fundamental strategy other than to pressure its management to maintain high earnings. The Lazard Report is a 343-page history of the kingdom that recommends keeping together the kingdom’s film and network pieces, but splitting up the rest, more cost cutting, a slate of new directors and leaders and an increased buyback of $20 billion. The report was not kind to Richard the Good. “[Time Warner] is at the center of the storm that has and will continue to jolt American industry. Technology, regulation and competition are changing at an accelerated pace. The markets are increasingly rewarding companies – across all industries – with a well-defined vision, as shareholder expectations on transparency, capital returns, appreciation and corporate governance increase. Against this backdrop, anticipating and harnessing change is critical for success. “This is the [Time Warner] story. It is a difficult story to tell because the history and performance of the Company has been skillfully enshrouded in the fog of one of the largest public relations efforts in American industry. The spin is generated by scores of divisional people, over 30 corporate image executives and a series of outside public relations firms. Success is heralded as triumph; failures are trumpeted as success. A corporate mythology is spun and is largely accepted, unchallenged by the media. Some facts are simply obscured.” The Lazard report accused Parsons of leading the kingdom into the bowels of financial hell, saying the stock underperformed by 51 percent on his watch. “By definition, I’m the ultimate subjective source,” says Parson, sitting serenely beside Wasserstein in front of the law and business students. Referring to the matter as the “interaction between Carl, myself and our board,” he believes Icahn failed to meet his objectives, “although at the end of the day you try to give everyone a way out.” Parsons believes Time Warner was simply too big a conquest for Icahn, who simply couldn’t amass support from enough existing shareholders. Successful shareholder activism today is about telling a story that’s credible not just at first blush, readily drawing media buzz and headlines, but one that develops some legs with those whose money is on the line. It is those investors, no longer as passive or entrenched, who must be convinced someone has a better plan and is capable of following through on it. “It’s not enough to stir the drink,” he says. In Icahn, Parsons believes he was dealing with someone who sees himself as the event, to whom people will give money for that reason alone. But when taking on the kingdom, you need a big damn event. A really big damn event. And going to a fancy Manhattan hotel to release a hefty report that does not answer the question, “How Carl would awaken the princess?” was not a big event. “As law students may not know innately, it takes two points of view to make a market. What do most people think, where does the market settle,” explains Gene Sykes of Goldman Sachs, which advised Time Warner in the battle. Sykes viewed the Lazard Report as an argument that Icahn could split up the company, do a Dutch auction and increase the company’s value 30 percent. “Shareholders ultimately did not accept that argument,” he says. Parsons says the company worked an agreement with Icahn that essentially allowed him to save face, by Time Warner increasing its buyback program to roughly the amount Icahn suggested: $20 billion. “Every case stands on its own facts and this one in particular because there are people waging and defending these campaigns. So how broadly you can apply this to the overall corporate environment, you have to decide,” Parsons says. Wasserstein does not see the campaign as a failure, seeing a change in the kingdom as well as the upside Lazard helped deliver to itself, Icahn and other shareholders. “This requires you to think beyond slogans, spin and reflect where is reality, what are the objectives,” Wasserstein explains. Wasserstein’s mantra now is “Go Dick,” he says. Parsons smiles. Lazard became a significant shareholder of Time Warner in the battle, which Lazard says has helped the company get religion. Time Warner has cut the string on AOL’s failure in Europe, dramatically shifted its decrepit AOL to an advertising platform, started using some of its cash and significantly increased its stock buyback. “How did that happen,” Wasserstein says, gesturing with his expressive hands? “They found religion.” And then it’s time for Bob and Leo. “It’s an interesting story,” Strine says. “When you talk to investors, there’s almost a universal view you should be getting more cash back. In retrospect, were you as close to your investor base as you should have been?” Parsons leans forward, pulls over the microphone and says, “Probably not.” “This is not a deposition, is it?” Clark asks. But, Strine pushes further: Didn’t Time Warner perform terribly by hoarding cash and not investing it in new products? “Everyone is living fat and happy and I understand you have a great view from your office, according to Carl. I bet he has a crappy view. Was the Lazard plan going to” significantly increase shareholder value?” “It didn’t find favor with the people who own our company,” Parsons responds. “Sophisticated investors had an opportunity to evaluate these arguments, and assertions and determine if they were accurate, fair or appropriate.” What long-term investors found more compelling, he says, was not any series of snapshots taken out of context, but the feature-length film that showed good decision-making in a challenging and fractured but very happy ending for media kingdoms. Wasserstein saw Parson’s experience as “sort of like a very fundamental lesson about corporate life, which is bad things happen to good managers.” But where he feels Parsons and his board fundamentally failed was to leave a depression-era mentality once the hole in the boat was plugged. Was Icahn’s unwillingness to take a seat on the board an implicit admission that he’s only in for the short term? Strine asks. Why won’t he say, “We will eat our own cooking. We’ll be like Buffett, Jimmy and Warren”? Wasserstein points out that Icahn did put up his own money, though demurred on other issues with board membership. But, says Strine, I’m an index investor, so I am not telling Richard Parsons how to run the company. Icahn comes up with a plan that will have generational effect on Time Warner. He wants to elect people to run the company. He is not willing to be one of them who actually sits in the fiduciary seat and takes responsibility. It suggests he wants to be able to sell his stake whenever he wants and not face the potential liability of Parsons or Clark. Isn’t that a problem? “You have the luxury of being relentlessly logical here in the citadel of academe, right?” asks Parsons. “Carl’s had experience trying to run things before,” he leans forward, hands splayed and the students laugh. “A. That’s hard. B. That’s not his gift. And C. That’s not really what he was after. “This is a human drama here,” Parsons says. Page: 4 of 5 pages for this article « First < 2 3 4 5 >
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