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Time Warner to Pay $2.4 Billion for AOL Suit

Date Class
3rd Aug 2005 Questionable Business Practice
Time Warner said today that it had agreed to pay $2.4 billion to shareholders who accused its AOL unit in a lawsuit of exaggerating revenues in order to push through the companies' merger in 2001.

The cost of settling the legal dispute offset all of Time Warner's earnings from the second quarter, and the company posted a net loss of $321 million. This was the company's first loss since 2002 and a sign of its struggle to make a success out of what was heralded as a royal marriage of old and new media.

Still, getting the case behind it allows Time Warner, the world's largest media conglomerate, to move ahead with other plans to make AOL more profitable after several sluggish quarters at the unit, which was initially dominant in the combined company. AOL had boldly bought Time Warner using its high-priced stock - the stock that investors said in their lawsuit was pumped up by overstated revenues.

Time Warner admitted no wrongdoing in settling the lawsuit today. Besides committing to pay the $2.4 billion, the company set aside an additional $600 million for any additional settlements, leading to a $3 billion deduction from its profits in the second quarter, which ended June 30.

"We're aiming to avoid the costs, risks and distractions of protracted litigation," Richard Parsons, Time Warner's chairman and chief executive, said in a statement. He added, "Even after considering the reserve, our balance sheet remains strong."

Howard Bicker, the executive director of the Minnesota Board of Investment, the lead plaintiff in the shareholder lawsuit, said, "As far as we're concerned, it's settled," and said the board was "very satisfied" with the deal.

Shares of Time Warner were trading down 17 cents, to $17.25, this afternoon on the New York Stock Exchange.

The company's net loss of $321 million, or 7 cents a share, compares with net income of $777 million, or 17 cents a share, in the second quarter of last year. Revenues declined 1 percent, to $10.7 billion, from the second quarter of 2004.

But excluding legal costs, merger costs and several other unusual expenses, earnings from the company's operations totaled $2.6 billion, down 3 percent from a year earlier.

Time Warner reported that earnings rose strongly at Time Warner Cable and its publishing division, which includes magazines like Fortune and Time.

But its network unit, which includes HBO, the youth-oriented WB Network and Turner Broadcasting, showed slower growth. So did filmed entertainment, but that was based on very tough comparisons - the company owns Warner Bros. Entertainment and New Line Cinema, which last year was flush with proceeds from the "Lord of the Rings" trilogy.

AOL posted operating income of $368 million, a 33 percent improvement over $276 million in the comparable quarter last year. But its revenues dropped 4 percent to $2.1 billion, as an increase in advertising failed to stem the steady loss of subscribers

Time Warner also said it planned to buy back $5 billion of its shares over the next two years.




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