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Time Warner's Parsons now must woo Wall Street

May 2004

Time Warner's Parsons now must woo Wall Street

By Jon Friedman 

NEW YORK (CBS.MW) -- On Friday, Time Warner chairman Richard Parsons conquered Main Street, flawlessly presiding over his company's annual shareholder meeting in Burbank, Calif.

But wowing Wall Street and professional money managers will be a more daunting task for the upbeat chief of America's largest media and entertainment company.

"I'm on the fence about Time Warner," said Susan Kaplan, president of Kaplan Financial Services in Boston, which manages $400 million for clients. "I've liked Time Warner, but it is the AOL part of the company that makes me concerned about its prospects."

Kaplan's indecision about Time Warner underscores Parsons' challenge. He's convinced individual investors that Time Warner is moving in the right direction but conceded that it would take several quarters to convince the skeptics.

Parsons stressed that "nothing of significance" would be sold by the company, hinting that AOL would remain in the fold. He declined to say whether Time Warner wanted to buy either Adelphia or Metro-Goldwyn-Mayer (MGM).

Professional investors, however, are a notoriously cynical lot and their concern is not something as simple as, "What have you done for me lately?" Instead, the issue is, "What will you do for me tomorrow, or most important, in the next quarter?"

What's more, Time Warner shares (TWX) have dropped about 6 percent so far this year, compared with a near-unchanged record for the benchmark Standard & Poor's 500 Index during the same period.

Trademark charm

On May 21, Parsons stood before some 500 shareholders and felt so relaxed that he often strode the stage at the Steven J. Ross Theater, on the Warner Bros. movie lot, with his right hand tucked in his suit jacket pocket. At the Time Warner meeting a year ago, a number of angry shareholders confronted Parsons and demanded him to answer for the AOL woes.

This time, Parsons used his considerable charm to turn a potential gang fight into a Carnival cruise. His repeatedly struck a soothing, upbeat tone and answered every question in the cordial, informal style that has become his trademark.

He calmly underscored that yes, the America Online unit has been an albatross for the company and for investors. But, he insisted, it's getting better, and other operations -- especially movies, cable and publishing -- remain solid.

In Burbank last week, the crowd of small investors wasn't too perturbed, either, when Parsons slipped in a bit of cold reality, stressing that the progress of the Securities and Exchange Commission's ongoing investigation into AOL's accounting methods was almost entirely in the hands of the U.S. government. He added that Time Warner had no choice but to wait and respond to the authorities' move.

"The investigation has been baked into the Time Warner stock price for a while," said Ken Marlin, head of an investment banking company in New York bearing his name. "People are looking most strongly whether Time Warner can sustain top-line growth, particularly in AOL, and see if it can get on to a steeper growth track than it's on now."

Indeed, AOL continues to be a sore spot. After all, everything else looks fine with Time Warner. The cable business looks robust;. publishing, even with an on-and-off advertising sector, is holding its own.

It was no coincidence that Time Warner chose to hold the annual meeting on its fabled Warner Bros. movie lot. The movie division, featuring Warner Bros. and New Line Cinema, has been cranking out blockbuster after blockbuster in the past few years. The booming slate's most recent addition is the Hellenic epic with Brad Pitt, "Troy."

New Line's last "Lord of the Rings" release won an impressive 11 Oscars in February, including the most prestigious Academy Award of all, Best Picture.

Moreover, the motion picture division's prospects look rosy for the rest of the year. "Harry Potter and the Prisoner of Azkahan" is coming out on June 4, and it's expected to take its place among the previous Potter movies as one of the most successful releases in the business. Plus, a spin-off of the "Ocean's Eleven" blockbuster of a few years ago is due to hit theaters this Christmas season.

Analysts: You've got AOL

Still, some observers have concluded that Time Warner may be too big for its own good.

"If Parsons simplified the business and divested some things, the company would look like something that looks to the growth markets of the 21st century," said Michael Holland, president of money manager Holland & Co., which is not a Time Warner stockholder. "Cable is going to be major, but so will wireless. There is so much good stuff at the company but it is diluted by [AOL]."

Added Patrick Adams, the president of Choice Funds in Denver: "The catalyst for the stock is the company getting rid of AOL. They don't have any immediate plans to do that so I'm not pumped up. AOL is just a distraction."

Adams said he would "probably" buy the Time Warner stock if the company dumped AOL. "I think AOL will continue to lose market share in an extremely competitive market. The franchise is waning. AOL used to be the standard for Internet connection, then people found out that the service could be basically free."

Parsons countered that logic by saying at the annual meeting that Time Warner's shares were "undervalued," and that the company's vast assets were being managed for growth. He cited a new culture of collaboration between the once-at-war Time Warner and America Online factions.

Above all, Parsons pledged to provide value for Time Warner, and he appears to have convinced Main Street investors. But as Parsons knows better than anyone, good words alone won't work on Wall Street. Time Warner will have to continue to perform well to persuade the most demanding investors of all.

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