Reese Schonfeld, CNN Founding President and Porter Bibb, Mediatech Capital Partners

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This is a partial transcript from Your World with Neil Cavuto, August 8, 2003, that was edited for clarity. Click here for complete access to all of Neil Cavuto's CEO interviews.

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NEIL CAVUTO, HOST: They hailed this as the greatest, biggest, baddest merger of all time. AOL (search) and Time Warner (AOL). New media meets old media. New media dictates to old media.

Today, the culmination of a stunning turn of events. Old media dictating to new media. AOL, you’ve got mail. And it goes something like this. You’ve got to go.

Looks like AOL Time Warner may be one step closer to being just Time Warner, a reflection as much about AOL’s stunning turn of fortune, as a realization that maybe the biggest merger in corporate history was a bad idea then and an even worse idea now.

In a stunning twist, management at AOL and management at Time Warner have been pushing to formally dissolve a pairing that made sense on paper but performed miserably in reality. Is getting rid of AOL in the name the first step in getting rid of AOL at the company?

Let’s ask Porter Bibb, the managing director at Mediatech Capital Partners, and Reese Schonfeld, the founding president of CNN, of course, an AOL Time Warner unit.

Reese, ending with you, begin with you. Do you believe these rumors? Now that they’re not so much rumors.

REESE SCHONFELD, CNN FOUNDING PRESIDENT: Yes. They’ve been going around for a long time. Dumping AOL seems to me like much ado about very little and maybe much ado about nothing.

For months now, there have been reports that they want to spin it off, that they want to sell it off, I don’t know. And they’re in trouble.

They’ve got $8 billion in debt still to reduce before the end of the year, and maybe they’ll find somebody who will buy AOL and help them there.

But I think they want to get rid of it entirely, and I think it’s a shame. I think they’ll buy and sell -- they bought at the high and they’re selling at the low, and I also think there’s nobody in that company now what you call AOL management.

They’re a bunch of new guys who were never there in the beginning, and I don’t think they have anybody in that company who knows how to run AOL and maybe they ought...

CAVUTO: But it’s interesting when you see this famous handshake, Steve Case and Jerry Levin. The idea was, Porter, that new and old media would come together and it would make great synergy and that it would be a sign of other companies doing the exact same thing, and it seems like zillions of years ago. It was only three-and-a-half years ago.

PORTER BIBB, MEDIATECH CAPITAL PARTNERS: Only three-and-a-half years ago, but then was then, now is now, and remember it was also not just the new media. It was the new economy, a whole new paradigm of economic indexes and measurements.

All of that’s out the window right now, and I agree with Reese. He’s right on the money. This is the first step toward divestiture, and they’ve got to do it quickly.

CAVUTO: When you say divestiture, what do you mean by that?

BIBB: They’re going to sell the online business.

CAVUTO: And AOL goes?

BIBB: Absolutely. They have to.

CAVUTO: Who buys? Who buys?

BIBB: Well, there are a number of really, really terrific candidates who could benefit.

CAVUTO: Give me a couple.

BIBB: The telephone companies: Verizon (VZ), SBC (SBC), Qwest (Q). Any of the big ISPs, the Internet Service Providers: Yahoo! (YHOO)

CAVUTO: Why would they want a service that’s down a million subscribers and losing them fast?

BIBB: Because it’s got a million and a quarter free cash flow that’s going to last for at least two or three more years.

CAVUTO: It’s a billion and a quarter.

BIBB: Billion and a quarter. And it’s got 25-million paying subscribers averaging $23 a month.

CAVUTO: Does that make sense? Selling it to a telco?

SCHONFELD: Yes, but I always wonder if the telcos have cash. AOL can’t afford to take it in stock.

CAVUTO: Microsoft (MSFT) has cash.

SCHONFELD: Microsoft has cash.

CAVUTO: Microsoft has MSN, an AOL rival.

SCHONFELD: Yes, but Microsoft and Yahoo! both may have antitrust problems.

CAVUTO: So they’ll hold back.

BIBB: I’m not sure Yahoo! does. Microsoft, of course, is treading on egg shells in Washington, but...

CAVUTO: But Time Warner, by the way, would keep some of the broadcast operations, like CNN. Time Warner would hang on to that, and...

BIBB: Oh, no, no. Just the online business.

CAVUTO: So just the online business that goes.

BIBB: The business that Jonathan Miller was brought in to run, to turn around, to put a new business model to, absolute failure. They have no business model.

CAVUTO: How much could you fetch for AOL? What do you guys think?

BIBB: Bottom -- bottom fishing, six to seven times free cash flow, you know, $7 billion, $8 billion, $9 billion.

CAVUTO: And you were saying AOL has -- what kind of debt is Time Warner AOL looking at?

BIBB: Well, the overall corporate debt is approaching $27 billion, but, as Reese pointed out, they have a mandate to off load at least $8 billion.

CAVUTO: Well, that would do it. That would do it, right?

BIBB: Oh, and you know, the stock would go probably 50 percent straight up if it did that.

CAVUTO: Well, it went up Monday just on this talk.

SCHONFELD: Eighteen cents.

BIBB: Eighteen cents.

CAVUTO: It’s a cheap stock. It’s a cheap stock.

SCHONFELD: It shows you it’s much ado about nothing.

BIBB: I think the big, big break would be not just on the financial side. You’ve got one of the most dysfunctional corporate organizations in history right now at Time Warner. Every executive, every employee has had his pension plan, his 401(k) wiped out by the collapse of the stock.

CAVUTO: So they want this to be dissolved.

BIBB: Absolutely.

CAVUTO: All right. By the way, the stock was up a little bit more than 2 percent today to north of 15 bucks a share.

All right. So where do you see this all going, if AOL goes in bed with somebody else and Time Warner is left with just what it had essentially before the merger? What does that say? Was this just an enormous waste of time, effort, money?

SCHONFELD: Well, even if we take Porter’s numbers, it’s still going to be worth about 50 percent of what it was before the merger, and that speaks for itself.

But they lost half the value of their company in that merger. It’s inexcusable, it should never have happened, and only the worst leadership in the world would have let that happen.

CAVUTO: Well, what about Ted Turner? Now we tried to get him. He’s on vacation, we’re told. He owns like Montana or Wyoming or one of those states. But now what happens with him? Or what role would he play?

BIBB: Well, he can never get the value back of the stock that he sold, but he’s still the largest individual shareholder in AOL Time Warner, so he will benefit if the stock does lift, and he’s now completely on the side of divesting the online business. He realizes what a colossal mistake it was.

CAVUTO: Well, he’s been selling a hell of a lot of stock, not even waiting around for that. So I know he’s still the largest single shareholder, but...

SCHONFELD: But beside all that, he doesn’t have the money to buy, he doesn’t have the money to get back in. This has left him with maybe less than $2 billion.

BIBB: Yes, that’s right.

CAVUTO: He used to like you, but now you...

SCHONFELD: Well, after I wrote the book, he never liked me.

CAVUTO: Oh, yes. Then he trashed you… Is AOL management just reading the writing on the wall, or do they genuinely want out?

BIBB: As Reese pointed out, there is no old AOL management left at AOL. These are newbies, and they really are just looking at a rational situation.

You can’t sell the online business and still call the company AOL Time Warner. So they’ve taken their first step. Wait for the other shoe to drop. It won’t take long.

CAVUTO: Let me ask you just a dumb question I have. I think AOL in the past used to be kind of training wheels for the Internet, and, once you learned your way around the Internet, you didn’t need the training wheels, and I’m wondering if that’s the bigger problem for AOL, that it’s very fancy training wheels, excellent service, but training wheels.

SCHONFELD: You know, 1,600,000 subscribers last year said, yes, they’d learned enough about the Internet and they left AOL and that AOL has got to find some new reason to keep them, and, so far, they haven’t done it.

BIBB: Well, it’s the transition to broadband, too. There is no AOL online can justify a premium price, $13.50 and $20, for the meager content that they’re providing, when you’re paying $30 or $40, $50 for broadband access.

CAVUTO: Porter Bibb, final word on the subject. Reese Schonfeld, as always, good seeing you.

Obviously, Richard Parsons is going to chew this over. He’s the guy who heads the company. Then he would take it to the board. The feeling seems to be almost universally that he would accept it, the board would accept it and then it would be done.

We shall see.

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