• by February 9, 2006

Merrill Lynch took issue with major elements of Carl Icahn and Bruce Wasserstein's appraisal of Time Warner Wednesday and predicted that their proposal to break the company apart would fail to "generate a meaningful change in operating performance."

On Tuesday, Wasserstein's investment bank Lazard issued a lengthy report in which it soundly criticized Time Warner's current management and recommended that the company be split into four separately traded companies. Lazard was hired by Icahn to prepare the report on behalf of an investor group that holds 3.3 percent of the company's shares.

Merrill Lynch Analyst Jessica Reif Cohen said in a report released by the brokerage house that she agreed with some of the criticisms leveled against Time Warner in the Lazard report, such as the poor performance of the company's AOL unit. However, she took exception to several others.

"Other criticisms are clearly misplaced, including the suggestions that Time Warner 'missed out' on the opportunity to acquire MGM or that (the publishing division) has failed to launch new titles," the Merrill report stated. "We also note that management has already undertaken initiatives to both increase leverage and cut costs."

On Tuesday, Wasserstein and Icahn told a packed hotel ballroom full of investors, analysts and reporters that Time Warner had been badly mismanaged since current CEO Richard Parsons took over and that the stock had lost $40 billion in value. They argued that a breakup and subsequent stock repurchase would increase the dormant share price and add the same amount of value back to the company.

Wasserstein said Time Warner's problems were due to generally weak leadership and the lack of a long-term strategy--despite the company's ownership of what he called "prime properties" like Time Inc., Time Warner Cable, AOL, Warner Bros., HBO, and Turner Broadcasting, among others.

The Merrill report disagreed with Wasserstein's assessment of Time Warner's leadership.

"Other than AOL, Time Warner's divisions have generally been well run and appear to suffer from few of the 'disynergies' that the report has suggested are rampant," it said. "We doubt splitting the company up would generate a meaningful change in operating performance and note that significant upside to valuation requires fairly aggressive assumptions."

Merrill also said that investors would be justified in asking "why the report offers no concrete suggestions on how to address Time Warner's biggest strategic concern (AOL)."