Icahn targets board as row over Time Warner gets personal

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As the owner of the CNN television network, Time magazine and a string of other well-known current affairs and entertainment businesses, Time Warner is used to being a powerful player in the news industry.

Yet now the world's largest media company is finding itself in an uncomfortable spotlight, due to a hard-hitting attack on its management by the veteran corporate raider, Carl Icahn.

Mr Icahn, who has built a 3 per cent stake in Time Warner with three hedge fund partners, wants to push through wide-ranging changes to deal with the company's faltering share price. If Mr Icahn gets his way, on the agenda could be replacing Time Warner's entire board and even breaking up the company.

It is a high-stakes battle for all sides. For Mr Mr Icahn, whose personal fortune is worth about $7bn (£4bn), Time Warner is the largest and most ambitious target in a career of daring raids on undervalued companies, such as his hostile takeover of the airline TWA in 1985. He has also employed Bruce Wasserstein, a legendary deal maker and chairman of Lazard, whose name on Wall Street could be badly damaged if the two fail to bring about serious change at Time Warner.

Finally, this bruising encounter could leave Time Warner's chief executive and chairman, Dick Parsons, ousted from his job.

For some, the struggle between Mr Icahn's group and the New York-based company is a praiseworthy example of shareholders rolling up their sleeves and tackling companies over their strategies. Another example of shareholder activism is happening at General Motors, where the billionaire investor Kirk Kerkorian is pressing for sweeping changes. For others, Mr Icahn's campaign is an opportunistic raid on one of America's most prestigious media companies, whose other brands include the Warner Bros film studio, at a time when the media industry is suffering from tumbling share prices and fierce competition from internet rivals.

Mr Parsons, who has a reputation for being an unusually affable chief executive, and Mr Icahn met in August to discuss their positions. Since then, relations have turned sour. Mr Icahn has said the board committed a series of blunders, the most serious of which was the controversial merger with America Online (AOL) in 2000, just as the hi-tech market collapsed. Mr Icahn said the board had "done the worst of all worst they could do".

Mr Icahn has also personally targeted Mr Parsons, highlighting the fact that he sold 700,000 shares in the company in 2001 at more than $50 a share, before the value of the merged AOL Time Warner collapsed. Mr Icahn is pressing for the company to buy back $20bn of its stock and wants it to spin off its cable television arm. He is also targeting AOL as an area for massive growth, and believes it should either be sold or repositioned to reflect the explosive growth of other internet companies in the past couple of years, such as Google and Yahoo!

Mr Icahn has now taken on Lazard to consider more far-reaching options. The two have said this will include putting forward a slate of alternative directors at Time Warner's annual meeting next May. In the meantime, Lazard is preparing a study to be completed in January on ways to boost Time Warner's value. Lazard, which advised its media rival Viacom on an internal break-up into fast- and slow-growing businesses, could advocate something similar at Time Warner.

Lazard might focus on the company's structure, considering whether there are significant synergies in its magazine publishing, movie studio, cable and other businesses. If not, that could prompt questions about whether the disparate businesses should be under one roof.

The investment bank may also look at Time Warner's costs, which are thought to include about $500m in overheads on its ultra-modern new headquarters at the corner of Central Park in Manhattan.

For all of Mr Icahn's posturing, Wall Street is sceptical about how successful he will be. His clout in fighting the board is limited by the fact that his group owns only 3 per cent of Time Warner, whose market capitalisation is $83bn.

Most challengingly, many believe Mr Parsons and his team have scored some notable successes. Tuna Amobi, at the credit rating agency Standard & Poor's, said: "The general feeling among the investors I have met is that Mr Parsons has been taking the right steps to restore the company to a position for future growth. Mr Icahn might get one seat on the board, but that is a long shot."

Since stepping up to the top job in May 2003, Mr Parsons has had his work cut out. When he took over, Time Warner was saddled with $30bn of debt and was the subject of investigations by he Securities and Exchange Commission and Department of Justice into irregular accounting at its AOL arm. Employee morale was also at a low.

Mr Amobi and others believe Mr Parsons has tackled these areas, settling the regulatory investigations, selling off businesses to cut debt and trying to buoy employees by bringing in new management at AOL and elsewhere and by articulating a strategy making each division in the company the best in its class.

Mr Parsons has also agreed to a $12.5bn share buy-back, introduced a modest dividend and is in the final stages of negotiating a deal, thought to be with Microsoft, about a tie-up with AOL to boost its advertising revenues.

Observers close to the situation suggest Mr Wasserstein would not have got involved if he did not believe there could be support for widescale change at Time Warner. It could also be the case that by the time Time Warner faces shareholders at its annual meeting in the spring, their attitude could be that Mr Parsons has done a solid job, but it is time for more radical change.

Time for change

Carl Icahn on Dick Parsons: He is a "nice guy" but "not the guy to run the company". Time Warner's board has done an "abysmally bad job" and the company is the "poster boy" for mismanagement.

Dick Parsons on Carl Icahn: "He and I are both from the same part of the city, Queens," Mr Parsons said to Bloomberg news about the area of New York where he and Mr Icahn grew up. "He must have grown up in the part where you yell at people and say rude things."

Jessica Reif Cohen, an analyst at Merrill Lynch: "The road could be more difficult than Mr Icahn has encountered in other investments, as even frustrated investors admit management has a relatively strong track record."