COMPANY TOWN : Better the 2nd Time Around? : Will Time Warner’s Rocky Marriage Affect New Spouse?

Just six years ago, Time Warner Inc. was celebrating a marriage: the creation of the world’s largest entertainment conglomerate from the Time Inc. publishing and cable empire and Warner Communications Corp.’s studio, music and cable operations.

Now the company is celebrating a new marriage that will reaffirm its position as the world leader, this time by melding Time Warner’s assets with Turner Broadcasting System Inc.’s cable networks and film studios.

But the record of the first merger raises red flags about the future of the second. Rather than a vaunted “synergy,” the combination of Time and Warner Communications has produced years of personality clashes and turf battles, financial burdens and business missteps that have hampered the combined companies’ ability to make its sum worth more than the parts.

In fact, critics say the company is paying a high price for Turner because it failed to exploit resources such as its People, Sports Illustrated, Money or Fortune magazines to launch cable channels. Repackaged for overseas consumption, cable networks are driving growth of companies like Capital Cities/ABC Inc., which owns ESPN, and Viacom Inc., which owns MTV and Nickelodeon.

“Time Warner has underplayed the synergy card,” said Andrei Jezierski, a principal at Booz Allen Hamilton, the New York consulting firm. “In theory, with the addition of Turner, the company could be punishing to the competition because of the desirable programming they will control. But Time Warner has never shown an ability to leverage its assets.”

Time Warner’s struggles serve as a cautionary tale at a time when the promises to make “one plus one equal four” figure prominently in media mergers such as that of Westinghouse Electric Corp. and CBS Inc. and Walt Disney Co. and Capital Cities/ABC Inc.

As one entertainment executive put it: “The problem with synergy is that it takes you away from your main business and the products consumers pay you for. It’s a distraction with an uncertain return.”

At Time Warner, synergy never had a chance to take hold, according to analysts, investors and current and former employees, because of a string of crises and unresolved management issues that have kept the company off balance since the 1989 merger.

Cultures clashed, the balance sheet remained mired in debt, a diversity of assets kept divisions at cross-purposes, and a cable strategy unpopular with Wall Street kept the stock price low and the company vulnerable to government regulation. What is more, investors never warmed to Time Warner Chairman and Chief Executive Gerald Levin, whose spotty record has made him a constant target of critics.

The fear among some investors is that many of these problems will weigh down the $7.4-billion merger of Time Warner and Turner.

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“The question is whether Jerry has learned anything from the past,” said one former Time Warner executive. “You’re looking at another two-year hiatus on stock growth unless Jerry goes in there and cuts overhead to show that he is interested in shareholder value.”

In an interview Friday, Levin said he had the experience of age and that the new merger rose out of a “comfort and joy,” unlike the Time Warner merger, which he said was “born out of angst.”

Indeed, in the midst of a stock swap between Time and Warner that would have merged the two in a 1989 debt-free transaction, Paramount Communications made a hostile bid for Time, forcing the combined Time Warner to take on about $16 billion in debt as they merged.

While the merger between Time Warner and Turner would be debt-free, it is in some ways an eerie replay of the Time-Warner match. It combines a bureaucratic company presided over by a ruminative chief executive--Levin--with an entrepreneurial concern run by a hands-on founder--Ted Turner.

The same volatile mix roiled progress at Time Warner for years after Time’s almost ecclesiastical culture was thrown in with that of Warner, which was dominated by Steven Ross, a schmoozer and big spender. Until Ross’ death in 1992, it was widely perceived that Time executives were being pushed aside and often out.

Power struggles broke out at Time Warner as soon as Ross became ill with prostate cancer. As old Warner hands tell it, Levin, who was third in command, helped orchestrate, along with Ross, the ouster of the No. 2, Nicholas Nicholas. Levin solidified his power as Ross lay dying, plotting the removal of Warner board members.

Although Levin, a Time Inc. strategist, inherited Ross’ mantle as chairman and chief executive, he never demonstrated Ross’ skill at smoothing over differences among the unruly and egotistical creative executives in his empire.

Turf wars and creative disagreements caused the management debacle at Warner Music that has undermined the world’s biggest and most profitable record company.

In the last year alone, six top Warner Music executives have resigned or been ousted, costing the parent company an estimated $55 million in severance packages.

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Some observers say that Levin’s own maneuvers exacerbated the situation. They say he stood by as music chief Robert Morgado drove out three key executives, including Mo Ostin, who built the Warner Bros. label from scratch, and then kicked out Morgado.

This summer, Levin installed as the $4-billion unit’s chairman Michael Fuchs, the head of HBO, who instantly clashed with Doug Morris, a Warner holdover, and soon fired him on the day Morris had expected to be promoted.

“Jerry should have been more of a mediator throughout,” said one Levin supporter. “Part of his problem is that he lets divisions fight it out among themselves. He’s very principled and doesn’t like to get involved.”

Said a harsher critic: “Jerry plays more the role of strategist than CEO. Things happen to Time Warner because Jerry doesn’t jump in and take control.”

In contrast, Ted Turner may have little stomach for Time Warner’s way of life. “Ted will get in there and say, ‘Hey, what company you working for anyway? Get with the program or get out.’ ”

Time Warner officials say Levin’s quiet, behind-the-scenes style has been necessary to reinvent a company with turbulent “political undercurrents.”

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They say he has slowly and methodically restructured the heavy debt after the merger to lower finance costs, rid the board of Ross cronies, broken up ingrown management in certain divisions like publishing, and plowed cash into critical new ventures such as cable and a new television network rather than rushing to repay the debt.

The company says these steps are about to pay off--and could only be helped by the addition of Turner’s rich libraries, which will immediately bolster cash flow and lower the company’s debt-to-equity ratio.

While most Warner executives, including Ross’ top advisers, have been eased out, so have many top Time Inc. people. After holding the three top titles for more than a year, Levin reached outside for a president last fall rather than fuel the factional feuding by choosing an insider.

“The culture is not as much a Time culture as it is a new culture,” said a former Warner executive.

One of Levin’s boldest moves, perhaps, was in tampering with the sacred home grown traditions of the publishing group by bringing in two outsiders at the top, Don Logan, from the company’s Southern Progress group, and former Wall Street Journal editor Norman Pearlstine as editor in chief of Time Warner.

“The one thing Jerry has going for him in the merger with Ted is that he is counting on synergies from the divisions that have had the most successes in the past, like publishing,” said one investment banker with ties to the company. “Pearlstine has done an extraordinary job in creating new products and getting Time Warner products online. CNN will directly benefit.”

Still, the Turner deal will do little to appease critics of Time Warner’s financial structure. Some investors, in fact, viewed the merger as a way for Levin to buy more time.

Many investors had run out of patience with Levin: As Time Warner’s debt remained stubbornly high, its stock price has continued to underperform such rivals as Disney, Viacom and News Corp. The stock has traded low enough to make Time Warner a takeover target, according to some on Wall Street.

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And many shareholders were dismayed in February when Levin vowed to reduce the company’s looming debt, then ran up a $3-billion bill buying more cable to narrow the lead of leader Tele-Communications Inc.

In Levin’s view, the cash generated by these new subscribers, plus money raised from selling assets, will offset the expense. Besides, the price was right.

“When Wall Street doesn’t like your industry, you can either sell at unfavorable prices or take advantage of the opportunity by buying,” said Geoffrey W. Holmes, who resigned from Time Warner in April, but had been an adviser to both Ross and Levin.

But several investors said it showed Levin’s lack of discipline. Said one institutional investor, who is marking time: “In the next year, we’ll know if he was brilliant to push more heavily into cable when everyone else was retrenching.”

As part of the February debt reduction plan, Time Warner also vowed to restructure a cumbersome partnership with US West. In 1992, the Englewood, Colo.-based Bell telephone operating company provided Time Warner with $2.5 billion in cash in exchange for an interest in Time Warner Cable, HBO, and the Warner Bros. film studio.

The partnership was faulted by Wall Street from the start as unwieldy, and many executives and investors thought the company was crazy to sell part of the company’s most prized asset, the studio, at what many believed was a bargain price.

People familiar with the arrangement also said Levin failed to give himself room to unwind the partnership. Although two Japanese partners, Toshiba Corp. and Itochu Corp., recently agreed to back out of the partnership in exchange for preferred stock in Time Warner, US West has become fond of the programming returns and refused to budge. In fact, on Friday, the company filed a lawsuit to block the merger with Turner, alleging that it violates the partnership agreement.

That could waylay Time Warner’s promised spinoff of its cable holdings into a stand-alone unit. Such a move was intended to free the entertainment assets from the pox of the cable operations, whose capital requirements continue to drag down earnings.

While all of Time Warner’s businesses make money, the company has been punished on Wall Street because of its costly cable vision. The company is alone among the big studios in betting that cable systems will be America’s delivery system of choice for receiving movie videos, phone calls and faster access to the information superhighway.

An unforeseen blow to its strategy came in 1993, when Congress slapped a bruising 17% rollback on cable rates, crimping cash flows critical to upgrade these systems with new interactive, digital and telephonic capabilities. Time Warner’s cause was further set back by its highly touted and costly Orlando, Fla., experiment in interactive television, replete with shopping and data retrieval services, which foundered for lack of consumer interest.

Cable stocks have started a recovery on the prospects that deregulation of the telecommunications industry will open the door to their offering telephone services and lifting rate restrictions.

Levin is perhaps the best positioned of all cable systems to leverage off of these freedoms, having built one of the most strategic networks in the country. Its “clusters” of subscribers in key markets such as New York City, Central Florida and Southern California, make services like billing and repairs more cost effective.

But in entering the phone business, the cable companies are haunted by their poor service records. And now Levin has the added distraction of a new group of assets to manage, a litigious partner, and two new powerful and restless stockholders to contend with in Ted Turner and John Malone, the chief executive of Tele-Communications.