Commentary: The guy from Google is in the picture; begin the AOL-TW divorce proceedings

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Breaking up is hard to do, even if things didn't really work out. But sometimes, going separate ways simply is the best option.

Time Warner chairman and CEO Jeffrey Bewkes must have come to that conclusion.

An AOL spinoff during the next couple of years is a distinct possibility with the appointment last week of Tim Armstrong as chairman and CEO of Time Warner's struggling online arm. The hiring seems to signal the coming formal end of the 2001 AOL-Time Warner merger, which never lived up to its promise of creating the behemoth converged media and entertainment prototype for the digital age.

Armstrong's likely ambition is finally to run his own company, and his reputation -- built during 81⁄2 years at Google, where he was instrumental in creating long-term relationships with big advertisers -- suddenly has made a stand-alone AOL a potentially viable proposition in the minds of Wall Street observers who long have had doubts about the scenario.

"TW is likely to spin off AOL to TW shareholders," Sanford C. Bernstein analyst Michael Nathanson says. "We would applaud this move."

TW needs the spinoff to end its much-maligned AOL merger, the lingering effects of which have aggravated shareholders.

A case in point is the reaction to Armstrong's appointment by Pali Research analyst Richard Greenfield, who calls it "a significant positive for TW shares as it will mitigate fears (at least near term) about TW's most worrisome asset."

Indeed, TW has tried for years to fix AOL, whose long-term vision has remained murky even after it changed its focus to an advertising-supported business model. Its financial momentum has continued to slip, and analysts predict further cash-flow declines.

With TW's spinoff of Time Warner Cable set to be completed this month, TW is taking a big step toward becoming a media and entertainment company focused on content creation. AOL is the next logical business to go as TW embraces its pure-play future.

"Jettisoning the perennially declining AOL would materially improve the growth profile of Time Warner Content," Nathanson says in a description of the company post-spinoff. "By our estimates, content earnings before interest, taxes, depreciation and amortization growth (2008-12 estimated compound annual growth rate) would increase from 2.5% to 7.1% if AOL is removed -- a nearly threefold improvement."

Time Warner doesn't really need AOL, with Bewkes in the past deriding the value of synergy within modern media conglomerates as overstated. Additionally, TW's brands have developed successful online destinations themselves, including CNNMoney and TheWB. TW's Turner Sports is responsible for such sites as PGA.com and NBA.com, which are part of the Turner Sports and Entertainment Digital Network.

The one collaborative success is celebrity and gossip destination TMZ.com, a joint venture of AOL and Telepictures Prods., which is part of TW's Warner Bros. But it should be easy to agree to a cooperation even after a spinoff or decide which side should get TMZ.

That leaves the questions of when a spinoff could happen and how TW will be rewarded for it financially, given all the money it has spent on AOL.

Timing will depend on when the markets recover, but Street chatter suggests a decision and an announcement could come during the next year. That would give Armstrong time to build a case for why a free-standing AOL might be attractive; some already suggest he must change its name to make people forget about the past.

"AOL is simply toxic," Greenfield says.

TW likely also will look to get some cash out of a possible AOL spinoff: Although it's too early even for insiders to discuss possible forms, TW is getting a one-time payout as part of the Time Warner Cable move, which will boost its cash war chest.

Also, AOL has worked hard to separate its audience business from its declining subscriber business. TW could spin off the former and look to fetch what analysts have said could be $2 billion-plus for the latter.

Whatever the details, this is the time for TW to work toward ultimate separation from AOL. No need to shed tears; no time for 2001 dot-com nostalgia. Let's get down to business.

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