Saturday, February 11, 2006

Earlier this week I was lucky enough to catch part of the live coverage of the press conference for the release of the Lazard report about Time Warner which had been commissioned by Carl Icahn.

I have not read the Lazard report and have no idea whether the proposed break-up into four units is the best way forwards but I do believe that the management of Time Warner in recent years has been less than stellar and that fundamental changes are likely to be necessary if shareholder value is to be realised.

Carl Icahn observed the tendency for people to sometimes "fall in love" with things to the point where judgements can become irrational. I liked the example he cited of the Alec Guinness character in Bridge Over the River Kwai who threw all of his energy and focus and emotion into building a bridge for the Japanese and became so emotionally attached to it that he attempted to block an attempt by the British to destroy it. Carl postulated that Dick Parsons appeared to have fallen in love with the corporate structure in Time Warner, much to the detriment of operating performance and shareholder value.

Several things strike me about this whole situation. The first is that, as so often happens, the incumbent management adopts a defensive posture and dissipates valuable resources in attempts to "fight off" the dissident shareholders. In my opinion this makes absolutely no sense and can only reinforce one's view that turf and egos are seen as more important than shareholder value. If increasing shareholder value is a truly an objective that is shared by both incumbent management and dissident shareholders then the ONLY logical course is for there to be dialogue about the strategies for achieving it.

It is entirely possible that the break-up recommended by Lazard is not the best way to go. Most of the financial press coverage I have read points to a number of reasons why the sales of the 4 businesses might not realise the intended values, However, if another course is to be followed then there are things which the incumbent management HAS to do going forwards, the most noteworthy being to facilitate more operational independence, eliminate dissynergies and cut much of the 40% increase in corporate cost which has been added in recent years. Perhaps a combination of some spin-offs and aggressive reorganisation and refocusing would be the best way to go but this is only likely to be achieved following an open-minded dialogue between the interested parties.

It does strike me that if Carl Icahn's group is going to stand a chance of winning a proxy fight it will be necessary for them to pursue the campaign in many different ways. The sheer size of Time Warner and the diversity of shareholders gives this proxy battle some unique characteristics particularly when the target is a media conglomerate headed by an individual who is said to be very skilled at campaigning and managing public opinion.

Another thing which I think would help and which would move this campaign into the 21st century is a website. During the last Presidential election I noticed that both sides made extensive use of the internet and to good effect. In this case what I would envision is a site where one could read and download the Lazard report, read bios and commentaries by the major players and find articles and information in support of the proxy fight objectives. There would also be news and business info about Time Warner and some kind of discussion board to allow people to add and share opinions.

I would see both of these adding constructively to the entire process of maximising shareholder value, in no small measure. Without knowing all of the details I have a fundamental belief that by far the best solution will be reached after extensive dialogue among many people. What needs to happen is for the underlying issues to be clearly spelled out and addressed and resolved. Whether the resolution absolutely requires that parts of the business be spun off or simply given the freedom to operate is entirely debatable, in my view, but there has to be full discussion and agreement on what are the underlying issues and it would appear to me that the incumbent mangement is not on that page yet.

An excellent example of a situation where the incumbent management has entered into a meaningful dialogue with dissident shareholders to good effect is the case of GM which has been subject to pressure from dissident shareholders led by Kirk Kerkorian. In this case, Rick Wagoner, CEO and clearly a consensus builder, has not only listened but has also implemented several of the actions suggested by Kerkorian's group. Admittedly the dynamics are very different and GM is in far worse shape than Time Warner but the principles are the same and the only real difference is that in the case of GM both management and dissident shareholders appear to be in total agreement concerning the fundamentals.

OK, I've said my piece......