Time Warner Dumps AOL

When AOL acquired TimeWarner in 2001 I was one of the only TimeWarner divisional presidents away from the New York headquarters cheering. Within months I had decided to start the process of easing myself into retirement. I was excited because after the death of TimeWarner's visionary founder, Steve Ross, the company quickly calcified and, at least on a corporate level, basically lost all sense of purpose. The only catastrophic mistake that I know of Steve Ross ever making was to allow an anti-charasmatic non-leader of men, Jerry Levin, to get in position to assume control of the company.

I've heard from other divisions that they were having similar problems to our own. By 2001 only the thickest and most vision-free Luddites in the world could have failed to see that the future of the entertainment industry was tied up with this new Internet thang. TimeWarner's reaction was fear and loathing, hiring clueless hacks to deal with "it," stifling innovation at every turn and, ultimately, buying a complete crock from a fast talking huckster, AOL's Steve Case, who basically "bought" the company for a song and dance-- a $147 billion deal that didn't really include anyone getting any money other than the $6 billion Case and his cronies were able to loot before being kicked out.

But when the "merger" was announced I had no idea how much worse my company was about to get. All I could think about was how AOL would "get" our need to start moving our business online. They didn't. To me the death knell for the music business will always be the long drawn-out response we got from the new AOL overseers to a proposal to start selling music by download. One of our sharpest young employees had developed an incredible model for this, and my boss, the Warner Bros chairman, and I urged it on corporate headquarters. The silence was deafening. We insisted. It took months, and they finally told us the idea was excellent and the interface "elegant," but that "we don't want to set any precedents."

By then I already saw that Steve Ross's ideas of running a company that could simultaneously benefit the shareholders, employees, artists, customers and community was "old think" and that "new think" was how to rip off everyone and concentrate wealth accumulation in the hands of top management. I told the sharp young employee that I was going to be leaving the company and that he should plan accordingly. He took his ideas to Apple and joined the team that developed iTunes and then the iPod. I retired and started DWT.

The business press is applauding today's announcement of the AOL and TimeWarner decoupling.

The $147 billion deal in which AOL bought Time Warner in 2001 epitomized the mind-boggling wealth created during the dot-com boom and quickly became one of the worst corporate combinations in history. In 2002 and 2003, Time Warner absorbed nearly $100 billion in charges to account for the rapidly diminishing value of the combined company. Time Warner even dropped AOL from its corporate name.

AOL once defined the Web for millions of people. But much of its original revenue came from providing dial-up access, a business that peaked for AOL in 2002 at 26.7 million subscribers, back when AOL commonly stuffed free trial CDs in magazines and mailboxes. The march of broadband ate away at that business, and AOL had just 6.3 million dial-up subscribers at the end of the last quarter.

AOL responded to the trend by giving away most of its services, like e-mail, to drive traffic to its free, ad-supported Web sites. It also laid off thousands of employees to try to streamline. But after a few strong quarters, ad growth slowed and then began declining.

The best study I've read of what went wrong was by Nina Munk, in a book called Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner, published in 2004 by Harper Collins. At the time, Vanity Fair offered an extensive excerpt, The Taking of Time Warner, which the New York Observer summed up more succinctly: "Fools Rush In really delivers in its vivid portrait of Jerry Levin, the perfect mark for the con of the century. " Meet the con:

In the spring of 1999, Steve Case was young (40), famous, and very rich (worth $1.5 billion). America Online, the company he'd built in only 15 years, was no longer a start-up or just another Internet company; it was one of America's most important companies, period. In a little over two years, AOL's split-adjusted stock had surged from $1.50 a share to about $75. Effortlessly, AOL had swallowed up Netscape, an icon of the Internet age, for $4.2 billion. Measured by market capitalization, AOL now ranked among the 25 biggest companies in the world, worth more than General Motors and Boeing combined.

...From Case's perspective, it was only a matter of time before someone noticed the lack of substance at AOL. He believed fully in the Internet revolution, but surely AOL's stock price couldn't keep rising; at some point, he reckoned, Internet mania, like other manias, would peak, and companies such as AOL would deflate. Quietly, Case and his top executives admitted the truth to one another: Internet stocks were way overpriced. "We didn't use the term 'bubble,'" remembered Barry Schuler, who was then president of AOL's interactive-services group. "But we did talk about a coming 'nuclear winter.'"

Something else: by 1999, Case had grown tired of running AOL. As he confided to someone close to him, he didn't want to go to the office every day. He wanted to devote more time to his family; he wanted his second marriage to last. Still, he had no intention of leaving his company in the hands of Robert Pittman, AOL's president. A smooth executive who'd turned around the last two companies he'd run, Pittman had arrived at AOL in 1996 in the middle of its worst crisis ever. Impatient with Case's long-term, dreamy, futurist thinking, and determined to make AOL profitable, Pittman had demanded short-term, tangible results. Before long, he was seen by outsiders as AOL's savior: in less than three years, between fiscal 1996 and 1999, AOL's revenues had grown from $1.1 billion to $4.8 billion. In Case's view, however, Pittman was an operator, not the man to lead AOL into the next century. He was a "windup C.E.O.," in the words of another AOLer close to Case.

It would take Case nine months to reach the decision to buy Time Warner. In his typically meticulous, unhurried manner, he brought together huge amounts of data and studied them; throughout 1999 he called meeting after meeting to weigh the options. With its giant market capitalization, AOL could buy anything it wanted, almost. The only question was what to buy.

...It was unrealistic, however, to imagine that an august, respected company such as Time Warner would be interested in a newcomer like AOL. What did Time Warner have to gain? What could AOL offer to Gerald Levin, Time Warner's chairman and C.E.O.? Asked what he thought of AOL's chances of doing a deal with Time Warner, [Salomon Smith Barney's Eduardo] Mestre told [AOL CFO Mike] Kelly, "To be honest, I can't see how it can be done. There is just no way they'll accept your currency."

That summer of 1999, a heat wave hit New York City. Day after day, week after week, relentlessly, the thermometer climbed over 100 degrees. There were widespread power failures. Subways stalled and summer schools were forced to close. But Jerry Levin had more urgent things to worry about than air conditioners and heatstroke. What about the future of Time Warner?

Levin had turned 60 that summer. Predictably for a man of his age and stature, his thoughts were turning to the legacy he'd leave to mankind. His son Jonathan had died in 1997; since then he had known that his own life lacked a higher purpose. Over the years, distancing himself from other media and entertainment moguls (the uncultivated and greedy ones), Levin had flaunted his high moral convictions and his learning. With easy allusions to the Bible (Ecclesiastes), to the French existentialist writer Albert Camus, and, in an interview with Architectural Digest, to Heracleitus, the pre-Socratic philosopher, Levin presented himself as a scholarly, upright man who just happened to be the C.E.O. of the world's largest media company. He didn't just want to be remembered as a C.E.O. who'd improved the bottom line; he aspired to be known for so much more.

Levin couldn't help but measure himself against Henry Luce, the visionary founder of Time Inc. Levin had read biographies of the great man; now, thinking about his own parting legacy, Levin sifted through Luce's speeches and letters catalogued in the Time Inc. archives. Luce had had it all: he was an intellectual, a gifted writer (whose prose, Levin noted, possessed "Presbyterian muscularity"), an innovator, and a brilliant businessman; even more, Luce was guided by a fine-tuned moral compass.

Levin didn't only share Luce's moral compass; he believed that, like Luce, he was ahead of his time. It occurred to Levin that just as Luce had harnessed new photographic technology to create Life magazine in 1936, so Levin would bring together media and the Internet to lead Time Warner through the digital revolution.

When Levin evangelized at internal meetings, preaching the good word about the digital future, the company's division heads listened politely, then ordered their mid-level managers to devise clever Internet strategies and launch Web sites here, there, and everywhere. But nothing much changed. In the spring of 1999, Levin had been forced to disband Time Inc.'s disastrous Pathfinder "portal," which compiled articles from the company's various magazines -- but not before it had swallowed up something in the range of $80 to $100 million. From its inception, no one had really grasped the reason for Pathfinder's existence, nor had anyone figured out how to make money from the Web site. The magazines that were meant to provide Pathfinder's content offered as little cooperation as they could.

From Levin's point of view, his inspired, visionary plans for Time Warner were being undermined by the dull people around him. For heaven's sake, it was the summer of 1999! By now everyone who mattered on Wall Street had embraced the digital revolution or was riding on its coattails; yet in the small, blinkered minds of Levin's executives, the Internet barely figured. Some division heads didn't even use e-mail! "They were too embedded in the analog world" is how Levin explained it to me.

Earlier that year, all of the company's division heads had presented Levin and Richard Parsons, Time Warner's president, with their latest five-year plans. Sitting through endless, tedious PowerPoint displays, slide shows, and strategic reports, Levin was overcome with despair. It was hopeless. Not one of Time Warner's divisions had come up with a convincing Internet initiative or strategy -- not even the music division, which everyone knew was losing sales to free online music-exchange services such as Napster. Terry Semel's presentation, glitzy and fast-paced, had tried to prove that Warner Bros.' film and music divisions, of which he was co-C.E.O., were on the cutting edge of the Digital Age. But when Levin asked Semel for specifics, there were none; in Levin's eyes, Semel didn't have a clue [and was he ever right about that!]. What were these men thinking?, Levin asked himself. What planet were they on? He wanted to grab his executives by their overpriced collars and scream: The Internet is here and it's real and it's passing us by! Don't you get it?

In the sweltering summer of 1999, Levin decided to take matters into his own capable hands. And why shouldn't he? After all, he reminded himself, he'd always forged his own path, and more often than not he'd been right. It was not for nothing that early in his career at Time Inc. he'd been dubbed the company's "resident genius": He, Gerald Levin, had had the prescience to put HBO on satellite in 1975. As C.E.O. in the early 1990s, he'd embraced cable when it was still out of favor on Wall Street. And, yes, he had engineered the brilliant takeover of Turner Broadcasting in 1996. Now he would lead Time Warner into the Digital Age. Suggesting his absolute commitment to the Internet ethos, Levin ditched his suits that summer; from that time forth, he'd wear the prep-school uniform of Silicon Valley: pleated khakis and open-collared shirts. "I was determined to transform the company -- and to do it internally," he later explained to me. If his divisions couldn't get it together, he'd force the matter from headquarters.

...The phone rang in Levin's office at 75 Rockefeller Plaza. "Steve Case is on the line," Nan Miller, Levin's longtime secretary, told her boss. As Levin later recalled, Case didn't waste time with small talk; he went straight to the point: "Jerry? I've been thinking: we should put our two companies together. What do you think? Any interest?" Levin was caught off guard. Of course he was interested, but he knew better than to respond to such a question over the phone. The law was clear on such matters: if Case did offer to buy Time Warner, Levin could be forced to disclose the offer publicly, or at least disclose it to his board of directors.

Before Levin could catch his breath, Case threw out the bait: if America Online and Time Warner came together, he promised, Levin would of course be C.E.O. of the new giant company, while Case would be chairman. "I'm not interested in being an operating guy," Case told Levin confidingly. "You understand this business, Jerry. If we merge our companies, you should be the man in charge. I work better at this sort of strategic level."

Levin didn't bite the first time round. He replied cautiously: "I don't think so, Steve. But I'll think about it."

In retrospect, Case's offering Levin the position of C.E.O. was the deciding factor in the creation of AOL Time Warner. "If he'd said anything else, there's no fucking way I would have gone ahead," Levin would later tell me, remembering the substance of that October phone call. "There was no way AOL was going to run Time Warner."

But Case had called his bluff; having made one painless concession to Levin's ego, Case would now take him to the cleaners. Armed with months and months of meticulous research, Case and his advisers knew how to build the perfect trap. In the words of Kenneth Novack, AOL's vice-chairman and Case's closest adviser, "We believed that the only basis on which Time Warner would be prepared to do a merger with us was if Jerry was the C.E.O. and it was perceived as a merger of equals."

As soon as he was off the phone with Case, Levin summoned Dick Parsons, Richard Bressler, head of Time Warner's new digital-media division, and Christopher Bogart, Time Warner's deputy general counsel, into his office. Levin was intrigued by Case's proposal. It was the perfect solution to Time Warner's lack of a digital strategy! America Online wasn't only a successful Internet company; it was a real business. The men who ran America Online didn't play Foosball at the office or allow employees to bring dogs and parrots to work; they had M.B.A.'s and wore Italian suits. What's more, Levin observed, AOL had a "blue chip" board of directors that included some of the very people he'd hoped to recruit to Time Warner's board -- people such as retired general Colin Powell and Marjorie Scardino, C.E.O. of Pearson P.L.C., publisher of the Financial Times and Penguin books.

Still, Levin was not naïve. After what he'd gone through in 1989 fending off a hostile bid from Paramount during the merger that created Time Warner, he was cautious, conditioned to assume that Case was secretly planning a takeover. America Online was worth so much more than Time Warner that a takeover attempt, either friendly or hostile, was a distinct possibility. But Levin would not hand over Time Warner to just anyone, he vowed, especially not an upstart such as America Online. Thinking out loud, he said to his advisers, "Time Warner is not for sale." Parsons, Bressler, and Bogart nodded solemnly in agreement.

Nevertheless, the men agreed, a battle plan had to be drawn up; otherwise Case might catch them unawares. He was wily. Levin and his sophisticated advisers were pretty confident they could prevent a takeover. If Case was determined to do a deal, the only option was a merger -- "a merger of equals." And so it was agreed: Levin would hear Case out; he'd listen to him and digest whatever he had to say. But on no account would he say or do anything that might encourage Case to mount a takeover.

A few days later, on Monday, October 25, Levin called Case back. "I've given your proposal some thought, Steve, and I just don't see it," he began casually. "But maybe you and I should get together, not to talk about a deal, but just to talk about what you're trying to accomplish, what your values are, and to get to know each other." A week later, Case flew to New York to meet Levin for a private dinner. To avoid being spotted together, they booked a suite at Manhattan's Rihga Royal Hotel, right around the corner from Time Warner's headquarters, and ordered room service.

It was an unforgettable evening. Getting to know each other, Case and Levin talked the night away. They had so much in common—a love of fine wines, for example. More crucially, they were on a common mission. Business was not just about making money, they agreed; it was also about integrity and values and the greater good and making a difference. Both men steered their courses by a moral compass. With conviction, Case described the AOL Foundation, whose purpose was to empower the disadvantaged and disenfranchised and dispossessed by means of the Internet. He described an AOL-funded venture called Helping.org, whose purpose was to match volunteers and donors with nonprofit groups. AOL's My Government was out there, too, helping ordinary citizens connect to their elected officials. More and more, Case told Levin, America Online could help people control their destinies and change their lives.

That kind of high-minded talk resonated big with Levin. By using the new technology to give people access to news and information, and to one another, Time Warner could reduce ignorance, intolerance, and injustice. "I've been building networks all my life," Levin boasted.

As they uncorked a bottle of red wine, Levin felt a deep kinship with the young man seated across the table. He told Case about the painful depression he'd gone through after his son was murdered. Over time, he explained to Case, it had occurred to him that devoting his life to others was the best way to serve his son's memory -- and what better way to effect change than from his platform as C.E.O. of the world's most powerful news-and-entertainment company? "Henry Luce never apologized for being a businessman, and neither do I," Levin said to Case. "Making profits is not incompatible with making a real difference in our society." Case would drink to that.

By the end of the evening, they were of one mind. Together they could create the world's most powerful and respected Internet-driven media-and-entertainment company. And they'd make the world a better place.

So much for lofty ideals and sentiment. If Case and Levin were to bring their companies together, they would have to agree on terms. Sorting out management issues seemed easy enough: the new board of directors would be split equally, with eight members from AOL and eight from Time Warner. Case would be chairman, Levin would be C.E.O., and the position of chief operating officer would be shared by Dick Parsons and Bob Pittman.

When it came to the subject of ownership, however, the two sides weren't even talking the same language. Yes, Case and Levin had agreed that it would be a "merger of equals," but what did that mean? Were the two companies equal in size, in value, in power? Time Warner, with revenues of $27 billion, had 70,000 employees. By contrast, AOL was tiny, with less than $5 billion in revenues and fewer than 15,000 employees. In another era, a less manic one, Time Warner might have swallowed up AOL without blinking. But the late 1990s were not normal times. And from the perspective of the stock market (what other perspective mattered then?), AOL, a company with one-fifth the revenues of Time Warner, was worth almost twice as much: $175 billion versus $90 billion.

AOL's bankers were perfectly clear on what the figures meant. If the two companies combined, AOL would account for 65 percent of the new company, Time Warner 35 percent. But Levin wouldn't buy the math. From his perspective and that of his advisers, the deal's exchange ratio -- the number of shares a shareholder in one company would receive in the new, combined company -- should be based, at least partly, on revenues, or cash flow, in which case Time Warner's shareholders would have as much as 85 percent of the new company. The difference between AOL's proposed ratio and Time Warner's seemed insurmountable.

Back and forth, back and forth, the two sides went, each time making the smallest possible concessions. Still, no real progress was made. "It was like trying to mate a horse with a dog," one of the negotiators told me.

A week before Thanksgiving, on November 17, Case was in New York; first he met with Ted Turner, then with Levin. As Time Warner's biggest individual shareholder, with about 10 percent of the shares, Turner had to be sold on the deal. But Turner was unimpressed. It's not that he was opposed to the concept of merging Time Warner and AOL, but he was suspicious of Internet valuations and he had other priorities. Levin, as usual, didn't pay a lot of attention to Turner, but even he was starting to think that a deal with AOL was impossible. No matter how badly he wanted a merger, he would never take less than half of the new combined company. "The deal's off," Levin told Case. "I'm sorry."

Frustrated, Case returned to Dulles... On December 13, another negotiating session took place, and on December 23 yet another, this time at Novack's office in Boston. Reflecting the absolute seriousness of the talks, Bressler and Novack were joined by all the top brass: Dick Parsons; Time Warner's banker, Paul Taubman of Morgan Stanley; AOL's chief financial officer, Mike Kelly; and AOL's banker, Eduardo Mestre. By now, Levin was offering to make the deal a clean 50/50, a real "merger of equals." In response, Case had lowered his former demands, but only slightly, proposing a 60/40 split. "I was prepared to pay a premium," Case later told the New York Times, "but there was only so far I could go."

Jerry Levin was torn. On the one hand, a deal with AOL was a matter of self-preservation. On the other, Levin wasn't a sucker. Case would have to pay a massive premium for Time Warner's shares; he, Levin, would take AOL for all it was worth. No matter how much he wanted to do the deal, he would never, ever take less than half of the new, combined company-it was an affront, an insult to his intelligence, asking him to accept 40 percent!

As Christmas approached, it seemed to the companies' negotiators that the two sides would never reach an agreement. As with all negotiations, the final concession is the hardest one to make, and no one would budge.

Levin spent the holidays in Vermont, at his 9,000-square-foot country house, built of thick wooden beams salvaged from old barns and decorated in Southwestern style by his wife, Barbara Riley. Surrounded by Navajo textiles, Mexican fiesta masks, and 19th-century tobacco pouches, Levin tried to think clearly. Mostly, like Thoreau at Walden Pond, he spent his days alone. He took long walks in the woods behind the house. In the afternoons he retreated to his small, book-lined study.

Almost every day, he spoke with Bressler by phone. Time Warner's fourth-quarter results were coming in, and they didn't look especially good. Already, the company's stock had fallen nearly 17 percent from its 52-week high in April; it would go lower still when these earnings were released, Levin had to assume. Time Warner's traditional lines of business were slowing down, and, for all its hype, the new digital-media division was going nowhere. Meanwhile, AOL's stock price had just hit its all-time high, $95.81; in the past 12 months, AOL's shares had climbed a staggering 329 percent. It could not have escaped Levin's notice that the Wall Street Journal, calculating that AOL's stock had risen nearly 80,000 percent in the past decade, named AOL the "Biggest Gainer of the '90s," over Microsoft and General Electric, among others.

The situation was obvious: Levin had to do something bold, and the boldest act of all was to merge with AOL. No matter how Levin looked at it, owning less than half of a combined AOL Time Warner had to be worth more than owning 100 percent of a sinking Time Warner. What other choice did he have? Alone in his study, Levin made up his mind. He would accept 45 percent of a combined AOL Time Warner, and nothing would stop him. In the long run, who would remember that Jerry Levin had accepted less than half of the new company?

Over and over, Levin rationalized his decision. His vision would drive the new company. After all, he'd been promised the job of C.E.O. Officially, on paper, if you cared to study the numbers, AOL would be buying Time Warner, but as far as Levin was concerned, the deal was unquestionably a merger. "I realized that it didn't matter what the numbers were, because we were equals" is how Levin later recalled his thinking.

At midnight on December 31, 1999, as the champagne corks popped, Levin made two resolutions for the year 2000: he'd shave off the mustache he'd worn for 35 years, and he'd become Steve Case's business partner. It was a new millennium, and Jerry Levin was a new man.

Monday, January 3, 2000: the first working day of the new millennium. It was unusually mild in New York City, somewhere in the mid-50s. Riding the elevator up to his office, on the 29th floor of 75 Rock, Levin felt easy for the first time in months. Meeting Dick Parsons, Rich Bressler, and Chris Bogart, Time Warner's newly named general counsel, for their weekly lunch in one of Time Warner's executive dining rooms, Levin declared himself. "We're going to do this deal," he said once they had been seated. "I've thought about it and I'm prepared to accept less than half."

Logic and high-school mathematics didn't apply to this groundbreaking deal, Levin explained. What he was proposing was the biggest corporate merger in history, and there was no way he'd let it fall through because of an inconsequential 5 percent here and 5 percent there. The crucial thing to remember was this: he would be C.E.O. of the new company, and fully half of the new board of directors would be his own people. Everything else was a red herring.

Three days later, on Thursday, January 6, Levin and Bressler took the Time Warner plane from New York to Virginia for a dinner meeting with Steve Case and Ken Novack. Now that Levin had agreed to accept 45 percent of the new, combined company, Case had to be persuaded to accept the remaining 55 percent. Neither Bressler nor Levin was convinced that Case would meet their terms, but they'd do everything in their power to sway him.

Sitting around Case's living room, the four men glided on social surfaces; they chatted about hockey and The Sopranos. Then they moved to the dining room, where dinner was served. Before long, when the time was right, Levin made Case a firm offer: Levin was prepared to settle for a 45 percent stake in the new company, but not a fraction less. Case was delighted; recognizing that Levin had just made the ultimate concession, he called up a rare bottle of 1990 Château Léoville-Las Cases from his wine cellar. It was just after midnight when the men finished their chocolate mousse and shook hands. The deal was done.

...Levin and Case were determined to sew up the deal as quickly as possible, before word could get out. If news of the merger leaked, the damage could be irreparable. For one thing, their companies' stock prices would go wild, thereby undermining the agreed-upon exchange ratio. And more: Levin and Case wanted total control in shaping coverage of the merger. As soon as the media got even a hint of the deal, second-guessing would start. Levin and Case still needed the deal to be approved by their boards of directors and by their shareholders; federal regulators too would have to sign off on the merger... To appreciate the reactions of some of Time Warner's top people, you have to know something about Levin's strategy and stealth. With the exception of Parsons, Bogart, Bressler, and Rob Marcus, who worked for Bressler, no one at Time Warner, no one at all, had a clue about the ongoing talks with AOL. The first time a select group of Time Warner employees knew about the imminent merger was that Friday morning at 10.

"We've agreed to a merger with America Online," Chris Bogart announced to the two dozen executives gathered around the massive mahogany conference table. "That's the good news. The bad news is that you're all sequestered until Monday. We've got three days to put this deal together, and until we do, you can't tell a soul what's going on, not even your families."

The executives didn't know what to think. On the one hand, the news was awesome. This would be the biggest deal in history, it was all being done in a weekend, and the people in that room were part of it. On the other hand, "we were shocked, shocked," one attendee told me, still shaken by the memory of that January meeting. "Never ever would I have guessed. I barely knew AOL. I mean, if the deal had been with Disney or any other media company, I might have understood. But AOL?"

People who did know AOL were no less shocked. Timothy Boggs, Time Warner's senior lobbyist, had spent the past year countering AOL's demands that regulators force Time Warner to open access to its cable systems. "I was stunned at the news," he told me. "I knew the AOL people well-- we were in battle with them. They were slippery and very aggressive. These were not people of quality-- not in my mind. I was stunned."

Edward Adler, head of Time Warner public relations, and Joan Nicolais Sumner, head of investor relations, sat together during the meeting. They were speechless. This giant deal, this monumental deal, has been unfolding for months and no one told us about it? Joseph Ripp, the company's chief financial officer, was numb. A no-nonsense numbers man, Ripp had dedicated his entire career to Time Inc. and then Time Warner -- and Levin hadn't consulted him!

Then there was Peter Haje, the company's longtime general counsel, one of the most accomplished and respected corporate lawyers in the country; his career had been devoted to Time Warner. On hearing about the AOL deal, Haje was enraged. Even more, he felt sickened by Levin's lack of respect for him. True, Haje had announced his retirement; as of January 1, 2000, he'd been succeeded by Bogart. But still, all through 1999, when the AOL deal was brewing, Haje had been the company's top lawyer. Why would Levin have frozen him out? If in the past Haje had ever had reservations about Levin, if he'd ever questioned Levin's abilities as C.E.O. (and he had), Haje had always kept his thoughts to himself. No longer. Now Haje told friends that the AOL deal was a disaster in the making; he wished only the worst for Levin.

If it occurred to Levin that executives such as Ripp and Haje would feel betrayed, he probably assumed that the damage would be short-lived. In the words of one executive, Levin was the company's "switchboard": he had long maintained power at Time Warner by controlling the flow of information.

As Chris Bogart outlined the terms of the AOL deal in full during the fateful Friday-morning meeting, his audience had more and more questions. "Why exactly are we doing this? What's the point?" asked one of the V.P.'s. "How long have the discussions with AOL been going on?" asked another. "Will we lose our jobs?" "Who's going to be running the company?" "How long will it take for the deal to close?"

At last, someone asked the overwhelming question: "You're telling us this is a merger of equals, but it doesn't sound like a merger. It sounds like AOL is buying us. How can that be good for us?" The question hung in the air like a swarm of gnats. Then the moment of recognition: Levin has sold us out. For reasons they could not fathom, Time Warner had been betrayed -- double-crossed by its own C.E.O. "You've got to be fucking kidding!" shouted Time Inc.'s C.E.O., Don Logan, when Dick Parsons called to give him the news. "That's the dumbest thing I've ever heard in my life. I hope you're joking."

Eduardo Mestre, AOL's banker, got word of the impending agreement as he was getting ready for bed on Thursday night. Mike Kelly called him at home: "How fast can you get your due diligence done, Eduardo?" There were mounds of documents to plow through, data to be sorted, meetings with executives to be scheduled. Proper financial forecasts had to be made. Mestre also needed to write up his bank's fairness opinion on the deal. In order to help AOL's directors vote on the proposed merger, he would have to make a convincing presentation to the board.

"We need a week, Mike, maybe 10 days."

"Forget it," said Kelly. "We're announcing on Monday. You've got three days."

"Surreal" was the word most people used to describe the atmosphere that Friday morning in AOL's "Malibu" conference room in Dulles, where two dozen of the company's top executives had gathered. Was this really happening? Were they actually buying the world's largest and most powerful media-and-entertainment company? In the words of one senior vice president who attended the meeting, "I was floored. It was wild. I'm like, 'Wow!'"

Mike Kelly conducted the briefing on the deal; as if he were planning a military invasion, he mapped out each piece of the strategy for completing the due diligence. "All of you in this room are leaving for New York first thing tomorrow morning. You can pick two of your best people to help on this stuff, but don't let them breathe a word to anyone. Got it?"

On Saturday, January 8, at eight a.m., two Gulfstream IVs packed with AOL executives took off from Hawthorne, a private airport near Dulles. David Colburn, Myer Berlow, and other top AOLers, overstuffed briefcases in hand, were on their way to New York to complete the biggest corporate acquisition the world had ever seen. They were pumped. They were psyched. We're buying Time Warner!

For three days, from Friday, January 7, to Monday, January 10, about 50 Time Warner executives, bankers, lawyers, and accountants took over the 48th and 49th floors of Cravath, Swaine & Moore's New York office, on Eighth Avenue at 50th Street. Meanwhile, across town, AOL had set up shop on the top two floors of Simpson Thacher & Bartlett, on Lexington Avenue between 43rd and 44th Streets.

Three days. There was no way on this earth that proper due diligence could be done in such a limited time. For a merger of this magnitude, a week's worth of due diligence would have been more appropriate. "If you do a deal over a weekend, you take shortcuts," one of the bankers involved told me later, acknowledging privately what he could not say in public. "In hindsight, it was sloppy."

"It really was a joke," one AOL lawyer remarked. "It was a done deal. We were just going through the motions so there wouldn't be any shareholder lawsuits. I got the feeling that no matter what I uncovered this deal was going to happen."

Both sides had to be sure they understood each other's businesses, and, more, that assumptions being made about their future together were based on concrete evidence and real numbers. Typically, that sort of information is written down and studied at someone's leisure; in this rushed case, however, most of the due diligence was conducted orally. Back-to-back, day and night, dozens of sessions were held in which AOL executives interrogated their counterparts at Time Warner, and vice versa. The pressure was intense. Time was running out, and there were still vast quantities of information to process. Mental and physical exhaustion set in.

As the weekend wore on and people wore out, the two sides bickered openly. Like a general, Mike Kelly barked out orders to his troops. Faster, faster. "What a prick," people on the Time Warner side whispered to one another. Treated like a servant by more than one AOLer, Rich Bressler was struck by the crudeness of it all. David Colburn and Myer Berlow were busy making locker-room jokes-anything to get a reaction from the uptight, plodding, well-mannered Time Warner executives, who, for their part, were offended by the AOL team's lack of decorum.

It occurred to more than one member of the Time Warner team that the tension building that weekend might be a sign of things to come -- that, after all, the AOL Time Warner partnership might be unworkable. Had they witnessed the fight that took place between Jerry Levin and Steve Case, their suspicions would have been confirmed.

It was shortly after noon on Sunday, January 9, less than two hours before Time Warner's board was scheduled to vote on the merger. Despite the pressures and time constraints, Bressler and Novack were still on the phone, haggling over details in yet another draft of the merger agreement. Novack was focusing on one key aspect of the document: the job descriptions of top management in the new company. Pointedly, Case was being described as "non-executive chairman."

"Is this right, Rich?" Novack asked, his Boston accent especially pronounced.

"Absolutely," replied Bressler. "That's what Jerry and Steve agreed on."

"Really? It doesn't sound right to me. Let me talk to Steve and get back to you."

Novack called Case at home. "They're saying you're going to be a non-executive chairman, Steve. Did you agree to that?"

"What the ... ?!" Case exploded. "That's bullshit! I never agreed to that. You tell Bressler that if Jerry wants me to be non-executive chairman the deal's off."

Case had never agreed to be a non-executive chairman, he insisted loudly. Why would he have agreed to that? To have no role in the combined company other than presiding over board meetings? The situation was unthinkable. It was nuts for Levin and Bressler to imagine it! AOL was Case's baby, his company, his genius; he had conceived of the merger with Time Warner, for heaven's sake! Sure, Case wanted to spend more time with his family, he didn't want to report to work every day, and he was glad to leave the day-to-day operations to Levin. But Case wasn't stepping down -- no way! He intended to play an active role in seeing his strategy put into operation. He was going to be involved. What sort of crap was Levin trying to pull, anyway? Case instructed Novack, "There's no way I'm going to be some figurehead, Ken, not in a million years. You tell them that."

Novack called Bressler back: "Listen, Rich. I just spoke to Steve. We've got a problem, and if it can't be resolved, Steve says the deal's off. He's not backing down on this."

"O.K.," said Bressler. "I'll call the old man and get back to you. But I'm warning you: I don't think this point is negotiable."

Levin, "the old man," was furious when Bressler called him. Where did Case get off trying to change the rule book at the eleventh hour? Up and down, Levin swore to Bressler: Case had agreed to be non-executive chairman, period. That was the premise on which the deal had been made. Remember that phone call back in October, when Case had promised to make Levin C.E.O.? That's when the two men had agreed that Case would not have an operating role in the new company, Levin explained to Bressler; he was absolutely sure of that. Otherwise, he would never have moved forward.

The clock was ticking. Time Warner's board was scheduled to meet in less than an hour. Novack waited to hear back from Bressler. He wasn't sure the deal would even happen; he'd known Case long enough and well enough to realize that Case wasn't going to back down, not an inch.

By the time Levin and Case actually spoke to each other by phone, Time Warner's board was assembling; it was just before two p.m. "Go take a jog, Steve," Levin blurted out, his head pounding. "You agreed to take a non-executive role." Levin's carefully devised scheme was crumbling. To make this deal work, Case had to be persuaded to take a non-executive position; how else could Levin maintain control of the new company? Sharing power was not an option, as Levin knew from hard experience. He had to have been reminded of Warner's Steve Ross and Time Inc.'s Nick Nicholas battling for control of Time Warner in the early 1990s. Yet what could Levin really do at this point? He was trapped. In his heart and soul and ego, the AOL deal was done. Levin was fully invested in it.

To anyone who knew the two men, what happened next was entirely predictable. Case stood his ground, stubborn and unshakable. Convinced as always that he was right, he told Levin that he would not take a non-executive role; unless his condition was met, the deal was off, now. And he meant it. Levin, by contrast, despite his tough, smart, New York talk, withered in the face of this last-minute confrontation. He had way too much to lose. Attempting to bully Case into submission, Levin had started off aggressively. ("You've got to have brass balls" was the crude expression favored by Levin and his closest associates when discussing their negotiating tactics.) Then, as soon as he was challenged by his calm and determined opponent, Levin had to back down.

The standoff between Levin and Case lasted only a few minutes. As it turned out, Case would not be a non-executive chairman. Far from it. He'd have specific areas of authority in the new company, including global public policy, technology policy, venture-type investments, philanthropy, and "future innovations." That wasn't the only concession that Levin agreed to at the last trump. In a most unusual arrangement for a company's chairman, Case would have a handful of top executives reporting directly to him and bypassing Levin.

If for a fleeting moment Levin had ever imagined he'd sideline Case and maintain total control of the new company, he should have known better by now. AOL was buying Time Warner; that was the reality of the situation. It was one hell of a way to begin a marriage of equals....

As for the investors and employees who lost billions and billions of dollars... well, by that time George W. Bush was president and his administration was very friendly to corporate managers and very unfriendly to actual business, investors and, obviously, employees.

Today's Barron's, calling the merger "one of tech's greatest disasters" (instead of, say, "another colossal failure of deregulatory-mad Republicans and the Bush Regime to protect shareholders from financial predators and campaign-contributing flim flam men"), assures us that this latest spin-off they're cheerleading "should benefit shareholders." Now I'm worried. "As Barron's tech guru Eric Savitz reminds us, the tie-up of Time Warner and AOL was valued at $106 billion when it closed in January 2001... but this Frankenmedia outfit today is worth just $27 billion. The good news is that this should create a leaner, meaner Time Warner." LOL!

And Barron's is urging people to buy it, calling one of the worst-run companies in the history of American business "a solid, undervalued media gem that should see a pickup in growth when the economic recovery finally rolls around." DWT's outlook: Caveat emptor.