Reality catches up with 'worst deal'

DUBBED the worst deal in history, the $165bn (£105bn) merger of America Online with Time Warner has come to symbolise the dotcom hangover that is doing so much to destroy investors' portfolios.

With the group already hit by plunging advertising revenues, falls in internet subscribers and internal bickering, the news that it is now being investigated for accounting irregularities seems merely to complete the cocktail of troubles that has beset the company.

AOL Time Warner's original shareholders believe the merged group should now adopt the Time name to reflect the unequal revenue split - had used its highly-rated paper at the peak of the internet boom to acquire a collection of old-economy businesses that were underpinned by the then-unfashionable characteristic of cashflow. Time Warner, it seemed then, even had the gall to deduct costs such as interest and tax when calculating profits - a foreign concept to the dotcom regime.

But economic and market reality has caught up with AOL Time Warner, culminating last week in the resignation of chief operating officer Robert Pittman, a former AOL executive.

In a telling symbol of the full circle being turned by financial markets, the board appointed two men from the original Time Warner stable to oversee day-to-day management of the combined business. Jeffrey Bewkes, chairman of the company's Home Box Office subsidiary, will head the cable networks and entertainment operations such as Warner Brothers while Time chairman Don Logan has been charged with repairing America Online. Both report to chief executive Richard Parsons.

Their targets are simple: increase AOL subscriber numbers, grow the average spend per customer and turn round the slump in conventional advertising revenue elsewhere in the group. But to achieve these Bewkes and Logan will have to defy worldwide trends at a time when renewed uncertainties surround the US economy and consumers' appetite for the internet appears to have waned substantially.

AOL Time Warner followers say the effective division of the company is as close as we will get to an admission that the merger concept, which was based on cross-pollination within the stable of businesses, was flawed.

The scope for cross-selling reader and internet services is far more limited than hoped and even the ability to cut costs has proved disappointing.

Some within the company said last week they felt the merger was just starting. But it is probably not the feeling shareholders want them to have.