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Time Warner's once-languishing shares have been up more than 20% since the end of September, largely as a result of expectations that settlements would be soon be reached to end federal accounting investigations that have stymied the media giant for two-and-a-half years.
Investors received that long-awaited news on Dec. 15 -- but the details turned out not to offer a full and final resolution to the missteps that followed the 2001 AOL Time Warner (TWX) marriage, dubbed one of the worst mergers in history. Time Warner will remain under government scrutiny for at least two more years according to the terms of a $210 million deal its America Online unit reached with the Justice Dept. It also announced on Dec. 15 that it had proposed a $300 million settlement, in which it will neither admit nor deny guilt, with the Securities & Exchange Commission. That proposal now awaits SEC approval.
"THIS STORY ISN'T OVER." The two settlements's total is consistent with the $500 million reserve that Time Warner said on Nov. 3 it would be setting aside to end the investigations. The overhang from those probes has been a severe burden, restricting the ability to issue shares and do deals. Even now the outfit has yet to move itself entirely out of the shadow of those investigations.
At least that's the way investors seem to see it. Time Warner's stock price closed unchanged on Dec. 15 at $19.38. In exchange for the company's cooperation., Justice agreed to defer charges against AOL that it aided and abetted securities fraud. Of the $210 million settlement, $60 million will be paid as a fine with the remainder being set aside for a victims' compensation fund.
"This story isn't over," says David Berg, a Houston white-collar defense lawyer. "Deferring adjudication is certainly innovative approach for the federal government."
PRAISE FOR PARSONS. Before this saga has run its course, Time Warner may be forced to take the stand and finger former AOL employees involved in several ad transactions in 2000 and 2001 with advertiser PurchasePro.com. At least six employees have been implicated so far in that deal, according to court documents. Beyond a spokesman saying, "We are committed to fulfilling our obligations to the government," Time Warner declined to comment on Dec. 15.
In terms of where Justice might be headed with its investigations, Deputy Attorney General James Comey on Dec. 15 said only, "I would urge you to watch this space" when talking about former AOL employees being implicated. It remains unclear how high on the corporate ladder prosecutors are looking. The deferral agreement requires AOL to "accept and acknowledge responsibility for the conduct of AOL personnel giving rise to violations of criminal law." That acceptance alone is enough for Justice to take the case to trial if Time Warner doesn't hold up its end of the deal, Comey said.
Even though a degree of uncertainty remains, some shareholders were encouraged by the progress, and they gave credit to Time Warner CEO Richard Parsons for his work to reach a resolution with the feds. "This really highlights his importance," says Morris Mark of Mark Asset Management. "Now you can begin to look at Time Warner without this sword of Damocles over its head."
EYES TO THE FRONT. Some shareholders also felt the Justice deal and the SEC settlement proposal, both of which would see the creation of restitution funds, helps Time Warner with the slew of private shareholder suits it still faces. "The shareholders have been punished enough. The likelihood of a big hit from civil suits has been lessened," says Lawrence Haverty Jr., a senior vice-president at State Street Research, a Time Warner shareholder.
The SEC declined to comment on when it might review Time Warner's settlement proposal. If the offer is accepted, the $300 million would go down in history as one of the highest single-company settlements with the commission. WorldCom paid $750 million in 2003.
While a collective sigh of relief has yet to be heard from Time Warner, its moves on Dec. 15 are a definite step forward for a company whose troubles have forced it to look back all too often.