Analyze this: TW gets thrashed

Pali's Greenfield takes dim view of Parsons, AOL

Time Warner was the victim Thursday of an unusually scathing Wall Street report by an analyst who called for a breakup of the company, told his clients that top executives aren't to be trusted and called Richard Parsons a "lame duck" chairman and CEO.

"We have simply lost faith/ trust in TW's executive management team and board of directors," Pali Research analyst Richard Greenfield wrote, cutting his recommendation on the stock from "buy" to "neutral."

Greenfield's dour tone mostly stems from TW's changing outlook regarding its AOL unit, where he predicts massive layoffs before the company's next quarterly earnings report in November.

An AOL spokeswoman said that the company doesn't comment on rumor, speculation or Wall Street analyst reports.

The analyst painstakingly goes through management's discussions of AOL's online advertising success, culminating with an abrupt change last month when executives made it known that the unit was vastly underperforming expectations.

"AOL's advertising revenue grew a stellar 40%," the company crowed a year ago. "Advertising growth is very robust at AOL," COO Jeff Bewkes said a month later. "I'm happy to say there have been modest surprises on the good side," AOL CEO Randy Falco said less than four months ago.

Then, when TW reported quarterly results last month, AOL's ad growth was just 16% and the company said: "We are stepping back from our expectations that AOL will grow its advertising at or above the domestic industry growth rate this year."

"We simply find this chain of events concerning and somewhat hard to believe," the analyst wrote in his research note.

Greenfield said AOL needs to be sold, "ideally in pieces with access being separated from content verticals/ad networks."

The analyst acknowledged his upgrade of TW to "buy" in July hasn't worked well, given the stock is down 9% since then, and he said the catalysts he expected won't occur any time soon.

He was hoping for a $14 billion stock buyback, but only $5 billion has been authorized; he slashed his estimates of earnings before interest, taxes, depreciation and amortization by $245 million this year and by $448 million next year, more than half the cuts attributed to lower numbers at Time Warner Cable; and he recommended the board conduct a serious search for a replacement of Parsons ahead of his May contract expiration.

The analyst said Bewkes, who is widely expected to succeed Parsons as CEO and chairman, might not be the best person for the CEO role given the troubles at AOL with a management team he installed. Greenfield also doesn't like "the rather odd tri-head management structure he installed at HBO."

"Given our belief that TW needs to be broken up immediately, we would actually prefer to see a corporate restructuring expert brought in as CEO and possibly shift Bewkes to a chairman's role."

After calling Parsons a lame duck, the analyst said he was "literally shocked" by a New York Times interview of Parsons where the CEO said: "This is my job. It's not my life. I don't define myself by this."

Said the analyst in his research note: "We simply cannot imagine a similar comment coming out of the mouth of News Corp.'s Rupert Murdoch, Disney's Bob Iger, CBS' Les Moonves, Comcast's Brian Roberts, etc."

Time Warner shares closed fractionally lower Thursday to $18.88.
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