Time Warner: Branded Again

Despite accounting miscues, Time Warner's balance sheet appears healthy, and the company's attention will focus more on governance and investor confidence and less on cash flow and finances. One in a series of ''corporate cleanup'' profiles.

A company beset by accounting problems, by any other name, is still, well, under investigation. So goes the story of Time Warner Inc., which recently dropped the AOL tag from its corporate title. Executives at the media giant certainly didn’t rename the company to sidestep alleged accounting improprieties at its online division — but the name change probably didn’t hurt.

The AOL name-dropping, which became effective on October 16, should help boost the confidence of Time Warner employees, partners, and investors. Indeed, jettisoning the online moniker will clear up confusion between brand and corporate identities, as well as emphasize that management does not support all of AOL’s aggressive accounting strategies — some of which are currently under investigation by the Securities and Exchange Commission and the Department of Justice.

The federal probes primarily focus on accounting and disclosure practices at AOL, including advertising arrangements and methods used by the online unit to report its subscriber numbers. Recall that the company’s accounting problems came to a head in January, when Time Warner’s amended 10-Q reported that it would restate two year’s worth of results by $190 million. (Though this was the largest accounting restatement in U.S. history, the financial impact of the adjustment represented just 1 percent of AOL’s revenues for the period in question.)

Still unresolved, however, is a row between the SEC and AOL over an intercompany advertising transaction involving Bertelsmann AG’s interest in AOL Europe. The commission contends that AOL inflated advertising revenues by booking an advertising barter deal worth $400 million as revenue. AOL management and the company’s auditors, Ernst & Young LLP, maintain that the accounting treatment is correct in light of current information.

Time Warner also faces pending shareholder litigation that could affect company operations, according to the top brass. As of August, about 40 class action and shareholder derivative lawsuits had been filed, accusing executives and board members with breaching fiduciary duties.

But despite the accounting miscues, Time Warner’s balance sheet appears healthy. For the first six months of 2003, the company generated $3.8 billion in cash flow from operations and threw off $2.5 billion in free cash flow, while increasing revenues by 6 percent to $21 billion. Net income for the first half of the year was $1.5 billion.

As a result, Time Warner’s cleanup efforts will concentrate more on governance and restoring investor confidence than on cash flow and finances. Indeed, AOL Time Warner’s stock price dropped from 76 at the time of the 2001 merger to 16 in September 2003.

As expected, the corporate brand lost some footing, too. According to BrandEconomics CEO Al Ehrbar, the value of the AOL Time Warner brand declined in several categories during the 18 months prior to June 2002 when the company was sorting out the restatement. For instance, AOL slipped 9 percent when measured for “trustworthiness,” declined 25 percent in its “high quality” ranking, and sunk 60 percent in “prestige.”

Rebuilding brand equity and investor confidence may prove a tough assignment — even tougher after a missed opportunity in May 2002, says Harvard Business School professor Quinn Mills. The board of directors named Richard Parsons CEO, and “with the whole country watching,” recalls Mills, Parsons “requested the company chairmanship, too.”


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