Time Warner to Post $321 Million Loss After Announcing It Will Set Aside $3 Billion to Settle Claims From AOL Merger

In an effort to close out what has been a costly debacle for the media giant, Time Warner Inc. has announced it is setting aside some $3 billion to settle class-action and individual fraud claims by shareholders who lost money after the company’s 2001 merger with America Online.

The settlement and related payments and reserves include: $2.4 billion to settle the pending class-action; $600 million set aside for additional shareholder claims; $100 million to be paid by Ernst & Young to Time Warner shareholders; and $510 million already agreed to be paid to close two government inquiries into the company’s accounting practices.

Although Time Warner Chairman and Chief Executive Richard Parsons is upbeat about new AOL-related projects including the creation of a free internet search engine similar to Yahoo and the recent success of the AOL webcast of the “Live 8” concert, the merger’s overall impact on Time Warner has, to date, been quite negative.

Since the merger, AOL subscriptions have fallen by over 5 million from 26 million to 20.8 million and the company’s advertising revenue has declined steeply from $2.4 billion in 2001 to the current $1 billion.

In this quarter alone, AOL lost 917,000 subscribers, causing a 4% drop in the unit’s revenue. As a result of the enormous reserve set aide for the settlements, Time Warner reported a second-quarter loss of $321 million, or seven cents a share, compared with net income of $777 million, or 17 cents a share, a year earlier. Revenue fell 1% to $10.74 billion from $10.86 billion.

While Time Warner might eventually consider spinning off or selling AOL in the future, Parsons said it was too early to think about those possibilities. The company did, however, announce it will buy back up to $5 billion of its stock during the next two years, in the hopes of boosting its stock price. 

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