• by February 8, 2006

To hear Carl Icahn and Bruce Wasserstein tell it, Time Warner CEO Richard Parsons couldn't find a stick of gold in Fort Knox.

At least that was the impression an observer might have come away with Tuesday afternoon, after corporate raider Icahn and his chief financial advisor Wasserstein outlined a report on the future of Time Warner to a packed audience of investors, analysts, and reporters. The report was officially issued by Wasserstein's company, Lazard, which was hired by Time Warner shareholders at the behest of Icahn to analyze the company's performance.

As expected, Lazard recommended that the company be broken up in order to restore what was characterized as much-neglected shareholder value. But the recommendations were also accompanied by a blistering critique of current Time Warner management in general, and of Parsons in particular. Icahn and Wasserstein were joined on a small stage at a midtown Manhattan hotel by Frank Biondi, the former chief executive of Viacom's Universal Studios and of HBO, who has agreed to be Time Warner's next CEO if Icahn gets his way.

"Our view is that Time Warner has been managed for the short term," Wasserstein said, standing between two color charts illustrating what he called "a history of underperformance" in Time Warner's stock price. "The stock has underperformed by all measures and has cost shareholders at least $40 billion in value." He said that the company has essentially been totally mismanaged since Parsons took over in 2002, and has repeatedly failed to take advantage of opportunities during a time of accelerated change in the media business.

The company was doing so poorly, Wasserstein said, because of a lack of long-term strategy, despite owning what he called "prime properties" such as Time Inc., Time Warner Cable, AOL, Warner Bros., HBO, and Turner Broadcasting, among others.

Wasserstein listed a litany of mistakes he said the company has made under current management--all of which he said led to "limited potential for growth and increasing shareholder value." The list included a "lack of conviction in the Internet and its potential," a misjudgment of financial markets, and the untimely divestiture of valuable properties for less than their real value, such as Comedy Central and the Warner Music Group. The report said those sales cost shareholders billions of dollars.

Regarding the company's online service, AOL--which itself was acquired in a deal that many investors viewed as ill-fated at best--Wasserstein said: "Since 2002, almost every decision regarding AOL has been wrong." He cited AOL's late adoption of an advertising strategy as an example of only one of many missed opportunities.

He also charged that the company's television operations had failed to create any "new, successful broadly distributed channels"--and that the publishing unit had not launched any new titles that contributed to earnings, in addition to failing to sufficiently develop its online capabilities, despite full and easy access to AOL's resources.

Lazard recommended that Time Warner be broken into four separate, independent companies, and that approximately $20 billion of aggregate stock should be repurchased by shareholders through a series of dutch auction tender offers. If implemented, such moves eventually would generate an estimated $40 billion in incremental value for Time Warner shareholders, according to the Lazard report.

The four divisions would be broken down as follows:

AOL. The company's Internet platform that includes an estimated 20 million subscribers and owns Web sites such as MapQuest and Moviefone.

NETWORKS AND FILMED ENTERTAINMENT. This unit would include HBO, Cinemax, CNN, TBS, TNT, Cartoon Network, Court TV, Warner Bros., and New Line Cinema.

PUBLISHING. Time Inc., which includes such titles as Time, Sports Illustrated, People, and Entertainment Weekly; Southern Progress Corp.; and IPC, a U.K.-based consumer magazine company.

CABLE. Time Warner Cable manages over 14 million cable TV subscribers in major markets including New York, California, Ohio, and Texas.

Under the proposal, each company would have its own board of directors, and would be traded separately and individually. "Each one has the capability of being the leader in their sectors and can appeal to their own investors," Wasserstein said. He added that each unit would also need to streamline operations in order to achieve "great savings," presumably by cutting jobs and expenses.

Lazard's and Wasserstein's opinion of Parsons seemed apparent on the very first page of the 343-page report. The page opens with a quote from Parsons culled from the book "Fools Rush In" by Nina Munk in which he states: "I'm desperately in need of a strategy."

When it was his turn to speak, Icahn reiterated Wasserstein's comments about why he believes the company needs to be broken up, and how it can restore shareholder value--and then he offered his personal view of Parsons. He said the Time Warner boss reminded him of the British officer Alec Guinness portrayed in the 1950s movie "The Bridge on the River Kwai." In the film, Guinness plays Colonel Nicholson, a prisoner of war in the Pacific who argues with his Japanese captors over building a bridge. He finally agrees to do so, unaware of a plan by his allies to blow it up upon its completion. When his own countrymen try to destroy the bridge, Nicholson tries to save it.

"'The Bridge on the River Kwai' is Dick Parsons' Columbus Circle," Icahn said, referring to Time Warner's new, modern headquarters building on Manhattan's West Side. "He's in love with the company's structure and he's in love with the building. He talks about loving the view from his window."

When it was his turn to speak, Biondi expressed his support of the report's findings, but surprised some observers by saying that if and when he succeeds Parsons as Time Warner CEO, he hoped that the company's COO, Jeff Bewkes--a Parson ally--would stay on to run one of the units.

After the presentation, Time Warner issued the following statement: "Our board and management regularly review all of the strategic options for managing this company to create the greatest value for our shareholders. We are on the right path. The company is delivering. Nevertheless, we will study the Icahn/Lazard proposal carefully and thoroughly, as is consistent with our existing practice and with our fiduciary duty to shareholders. We will have more to say on the specifics of the proposal in due course."

Time Warner also sent a letter to shareholders reviewing the company's progress in building value and stating its intention to communicate with them regarding the Icahn/Lazard proposal.

Reuters reported that shares of Time Warner showed little reaction to the Lazard report. Shares were down 26 cents, or 1.4 percent, to $18.32 in late afternoon trading on the New York Stock Exchange.