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ID# CU131
PUBLISHED ON
JUNE 17, 2014

Time Warner Restructures

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BY KATHRYN RUDIE HARRIGAN *

Introduction
In the face of declining demand for print media, Time Warner (TWX) was seeking strategic
alternatives for its Time, Inc. family of titles—including sale or divestiture—because print

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titles were considered to face limited profitability potential. Time Warner had previously
announced its intention to divest Time, Inc. in 2009 (when it divested AOL and Time Warner
Cable). In 2014 Time Warner concluded that the time was right to spin off Time, Inc. As Time
Warner Entertainment Company, it would face a worldwide marketplace with increasing
amounts of discretionary time that could be spent on entertainment that was accessible from
an ever-wider variety of distribution media.
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The Creation of Time Warner
Time Warner’s core entertainment company, Warner Brothers, started on the distribution
end of the media industry’s value-adding chain of activities. Warner Brothers traced its roots
to the 1903 creation (by four brothers) of a movie exhibition business that ultimately
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expanded upstream from movie theaters to film production, television programming, music
publishing, comic books, and other entertainment media. As a major film studio, Warner
Brothers enjoyed a high point when it employed actors such as James Cagney, Bette Davis,
Humphrey Bogart, Joan Crawford, Errol Flynn, Olivia DeHaviland, and Ronald Reagan. As
Warner Bros.-Seven Arts, it was almost penniless in 1967 when a funeral home operator,
Kinney National Company, acquired it (and changed the resulting conglomerate’s name to
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Warner Communications, Inc.), adding video games and theme parks to its mix of movies,
television, records, comic books, and the other entertainment media of Warner Brothers.
Warner Communications formed Warner Cable in 1974 and in 1977 offered QUBE, the
world’s first interactive video-on-demand service (delivered through subscriber’s televisions
via set-top boxes connected to modems). The QUBE offered 30 channels that included
premium and pay-per-view networks (as well as interactive channels). In 1975 Warner Cable
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Author affiliation Copyright information

*
Henry R. Kravis Professor of Business Leadership, Columbia © 2014 by The Trustees of Columbia University in the City of New
Business School York.

This case is for teaching purposes only and does not represent an
endorsement or judgment of the material included.

This case cannot be used or reproduced without explicit permission

from Columbia CaseWorks. To obtain permission, please visit
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 formed Warner-Amex, a joint venture with the credit card company, American Express, to

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acquire a satellite-broadcast entertainment company that also owned cable entertainment

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channels like MTV, Nickelodeon, and the Movie Channel. The resulting Warner-Amex
company (a cable system operator) owned a satellite entertainment company, a
programming packager (offering several cable-entertainment channels), and an early
interactive videotext service (QUBE); all of these businesses were in need of high-quality
programming content. For additional entertainment programming, Warner Communications

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bought Atari from Nolan Bushnell in 1976 (and re-sold the consumer and arcade divisions in
1984 and 1985, respectively). Warner Communications owned half of the Pittsburgh Pirates
for a year in 1983 and the Six Flags amusement park chain for five years—starting in 1993. It
also owned (and sold) the Franklin Mint company.
Warner-Amex subsequently became the prey in an attempted joint takeover bid by Time, Inc.
and Tele-Communications (who were the two largest cable television system operators at

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that time in 1985). Instead, Warner Communications and Time, Inc. ultimately merged in
1990—following a three-year takeover battle in which Paramount tried to outbid Warner
Communications for Time’s library of titles (which included popular titles such as Fortune,
Life, Look, and People) as well as its cable television and pay-TV assets. Time Warner Cable
was finally formed in 1989 by combining the assets of Warner Cable with Time, Inc.’s cable
television company, American Television and Communications Corp. to form a separate
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cable system operations division. 1
The Time Warner, Inc. that resulted from this merger added to its collection of print, comics,
movie, television, cartoon, and video game programming through its 1989 acquisition of
Lorimar and the 1996 acquisition of Turner Broadcasting System. The latter acquisition
returned to Warner Communications those rights to its pre-1950 film library that had been
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sold to raise cash during its difficult Warner Bros.-Seven Arts era. These acquisitions
represented important content additions that were needed to satisfy Time Warner’s growing
appetite for entertainment programming.

Time Warner’s Divestitures

In 2009 Time Warner made two noteworthy divestitures—America Online (AOL) and the
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Time Warner Cable businesses. Both divestitures represented investments in technologies

that had made sense at the time of their joining the Time Warner family, but which had
passed their prime and usefulness as Time Warner’s corporate strategy evolved. In 2003
Time Warner had sold Warner Music for $2.6 billion to an investor group (led by Edgar
Bronfman, Jr.) with the proviso that it could buy back up to 19.9% of the business at a future
date under certain circumstances. It also sold a half stake in Comedy Central, a stake in the
satellite television company that operated DirecTV, and the company’s stakes in the Atlanta
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Hawks and Thrashers sports teams. The divestitures were characterized as being part of an
effort to reduce Time Warner’s debt-servicing load following consummation of the AOL
deal.

Time Warner Restructures | Page 2

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 AOL

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In 2000 AOL purchased 55% of Time Warner for $164 billion and the resulting firm became

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known for a time as AOL Time Warner; the deal was officially approved by the FTC in
January 2001. 2 AOL paid for its acquisition with stock that quickly lost value because
subscribers connecting via cable or DSL connections quickly grew bored with AOL’s “walled
content.” The Internet bubble burst in 2001 and the many expected distribution synergies
that motivated the transaction were not realized. 3 The biggest advertiser on AOL Time

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Warner’s website proved to be AOL Time Warner itself. The expected benefits of Internet
distribution of Time Warner’s media products were slow to be realized, and Time Warner
removed “AOL” from its corporate name in 2003.
AOL had dominated the online world when it first proposed the combination of Time
Warner Cable with its position as first-screen Internet access. 4 Broadband Internet access
eventually became a reality, but AOL had lost its position of relative competitive advantage.

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In late 2009 AOL was spun off as a separate dial-up Internet service company. AOL was
remaking itself as a web publisher in 2014.
TIME WARNER CABLE
Controlling access to the last-mile residential consumer had once been a lucrative
opportunity, but technological substitution had lured some viewers to mobile platforms—
undercutting the value of cable franchises. As an industry, cable systems were vulnerable to
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natural disasters (like hurricanes) and residential consumers were not very tolerant of
services that they regarded to be utilities. Rate increases were often difficult to win—
especially when a cable operator had bid too low initially to buy market share or win the
franchise to serve major cities.
During the 1980s Warner-Amex had pushed to wire major urban centers at a time when
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other cable companies, like Time, Inc.’s American Television and Communications division,
were wiring less-costly smaller towns and suburban areas. Buying market share in urban
areas was costly. To win franchises, Warner Amex agreed to build better-equipped studios
than broadcast networks operated and offer three public access studios to produce content
for the public access channels that it provided. These expensive legacy costs dragged down
the financial performance of Time Warner Cable.
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As early as 1983 competitors were reported to be not especially eager to take over Time
Warner Cable’s franchises due to the pressing need to make investments in advanced
equipment and wiring to satisfy urban communities. 5 Its programming services—e.g.,
Nickelodeon, The Movie Channel, and MTV—were losing money and customers were
cancelling due to complaints of poor service. Cost savings were ephemeral and acquisition
premiums were difficult to recoup. (Ownership of The Movie Channel was contributed to a
joint venture with Viacom International in order to move its losses off the balance sheet. 6)
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As part of its strategy of “clustering” cable systems, Time Warner Cable acquired the cable
properties of Houston Industries for $2.3 billion in 1995. That acquisition was quickly
followed by the purchase of Cablevision Industries in a stock transaction. Clustered cable
systems could offer telephone services via cable as well as deliver entertainment. The 1.3
million subscribers of Cablevision gave Time Warner Cable a total of 33 clusters—each with

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 100,000 subscribers or more. The urban locations of Time Warner Cable’s franchises put 74%

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of its subscription base into clustered locations.

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Time Warner’s ownership of the then-dominant Time Warner Cable may have delighted
Steve Case (founder of AOL) in 2000, but it alarmed competitors such as the Walt Disney
Company whose programming from its broadcast television network was carried via cable
system operations. In May 2000, transmission of ABC programming was blacked out on
Time Warner Cable systems due to lost customers and other complaints concerning ABC’s

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joint venture with DirecTV to buy and install satellite dishes in Los Angeles. Disney
countered with demands concerning the prices charged for the transmission of three of its
cable channels. (Walt Disney owned several cable channels including the ESPN family of
programming and used ownership of valued programming as a counterbalance against the
bargaining power of cable system operators. Similarly in August 2013 Time Warner Cable
blacked out the programming of CBS on its cable system during their dispute over fees.)

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Time Warner Cable was divested in 2009 and in 2014 it was consummating the acquisition of
Comcast, a rival cable system operator.

Evolving Structure of Media Industry

Over time other media conglomerates have diversified in patterns similar to Time Warner’s
strategic posture and have divested those businesses that no longer proved to be
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advantageous as family members. The strength of potential vertical relationships among
their family members have waxed and waned as the competitive advantages of owning
business units with possible supplier-buyer relationships to each other has evolved.
Figure 1 illustrates that, in 1997, the six largest American media firms all participated in most
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of a dozen vertically-related lines of business by owning key players in each of them.

FIGURE 1. OPERATING ARENAS OF MEDIA FIRMS IN 1997
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Source: Ken Auletta, "The Next Corporate Order: America Keiretsu,” The
New Yorker, October 20, 1997, p. 225-228.

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 In 1997 Disney/ABC, Time Warner, and TCI operated cable and television broadcasting (and

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stations), satellites, telephone, and wireless communications systems; owned sports teams

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and sporting venues, theme parks, and stores; produced music and records, television and
film, home video, Internet content, interactive programs, and games; and published
newspapers, magazines, and books (but subsequently divested businesses that were no
longer advantageous to integrate). When necessary, media competitors often cooperated
among themselves—and with other firms—to create powerful webs of partnerships that

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were used for sharing the risks of developing new products, distributing their media services
more broadly by extending their global reach, and building the critical mass needed to justify
investments in costly assets with high capacity-utilization requirements. For example, Time
Warner cooperated with General Electric/NBC, Comcast, TCI, and News Corp. on the
Primestar satellite broadcasting venture. BSkyB was an alliance between News Corp.,
Comcast, and TCI. Microsoft joined with General Electric/ NBC to launch MSNBC. 7

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With time, Time Warner divested many of the distinctive properties that had been associated
with its history in order to focus resources on what it considered to be the choicest lines of
business to own. Whether its restructuring activity was motivated by profit-taking or other
strategic considerations, Time Warner’s corporate profile has been highly changeable and
continued to evolve in its (a) mix of businesses, (b) nature of the corporate contributions used
to justify inclusion of various lines of business in its corporate family, and (c) internal
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arrangements used to implement and rejuvenate its corporate strategy.

Time Warner in 2014

In 2014 Time Warner was organized into four divisions: HBO, Turner Broadcasting System,
Warner Brothers, and Time, Inc. By then the Warner Music Group, AOL, and Time Warner
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Cable had all been spun off as stand-alone companies.

HBO
Home Box Office (HBO) was launched in 1972 and acquired by Time, Inc. (then called Time-
Life, Inc.) in 1973. As its importance increased, HBO was carved out to become one of Time
Warner’s major lines of business. In 2014 Home Box Office, Inc. was a programming
packager that distributed licensed content as well as created its own content. In 1974 HBO
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broadcast its programming via satellite to distribution via set-top boxes. As one of the first
premium pay-TV networks, HBO had evolved from using microwave relays to broadcast
premium content as “Manhattan Cable Television” to producing its own original
programming of documentaries, films, and television series content, in addition to airing
feature films and programming from other sources.
Premium pay-TV networks frequently competed by gaining exclusive rights to air desirable
programming before it became available through other sources. By 1980 HBO had become so
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successful that it could finance films made by other studios in exchange for exclusive, first-
showing rights. In 1982 HBO joined with CBS and Columbia Pictures to form TriStar
Pictures, a film company. TriStar obtained its production assets from Warner Brothers
Studios while CBS, Warner Bros., and HBO distributed its content. HBO sold its shares in

Page 5 | Time Warner Restructures

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 TriStar Pictures in 1986 to Coca-Cola (then owner of Columbia Pictures) before TriStar

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Pictures was acquired by Sony in 1989.

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As a division of Time Warner Entertainment Company, Home Box Office provided two 24-
hour premium TV services—HBO and Cinemax—to subscribers across the United States via
cable, C-band satellite, direct broadcast satellite (DBS), and microwave (MMDS). HBO was
also available to guests in hotels and motels across the United States. The HBO service
offered over 90 theatrical motion pictures per month as well as its own exclusive

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programming (original movies, series, comedy, documentaries, family shows, and world-
class sporting events) and programming supplied by others.
In 2010 HBO launched its HBO GO mobile app—making HBO’s entire original
programming library and currently licensed theatrical programming available on mobile
devices at no additional cost to HBO subscribers. The app was the first of its kind to offer

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consumers accessibility to a content provider’s entire library, and was wildly popular—being
downloaded over one million times in the first week of its launch. By 2014 the HBO GO app
was available on iOS and Android devices, Roku, Apple TV, Samsung Smart TVs, Xbox,
PlayStation, and any desktop or laptop computer. Most of HBO’s competitors quickly
followed suit with apps of their own, and by 2014 having an over-the-top app available on
every platform was seen by the industry as being an essential component of a video-media
distribution business.
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TURNER BROADCASTING SYSTEM, INC.
Turner Broadcasting System was acquired by Time Warner in 1995 for approximately $7.5
billion (giving it the 82% of shares that Time Warner did not previously own). The
acquisition catapulted Time Warner’s combined revenues ahead of those of the Walt Disney
Company (which was planning the acquisition of Capital Cities/ABC at that time).
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In 2014 Turner Broadcasting System operated over one hundred branded cable-
entertainment channels (Cartoon Network, CNN, HLN, TBS, TNT, truTV, and Turner Classic
Movies), news networks, animation, children’s media, digital sports entities, and other
television network programming businesses, as well as produced television and radio
programming—especially in sports—that were carried by cable-system operators around the
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globe. Turner Broadcasting created and programmed branded news, entertainment,

animation, young adult programming, and sports media environments offered on television
and other platforms for consumers everywhere.
WARNER BROS.
The Warner Bros. portfolio of businesses included entertainment programming and
distribution businesses. It produced feature films, television programs, and other home
entertainment content (such as comics, videogames, iPhone and iPad apps, music, and other
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direct-to-consumer products). Warner Bros. distributed its content to broadcasting, home

video, digital distribution conduits, animation, comic books, licensing, and international
cinema outlets. Its DC Entertainment division brought characters from the firm’s DC Comics,
Vertigo, and MAD Magazine publishing activities (such as Superman, Batman, and members
of the Justice League) to the content and distribution businesses of Warner Bros. Through its
WB Shop, Warner Brothers sold merchandise including copies of its movies and television

Time Warner Restructures | Page 6

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 programs, as well as licensed clothing, accessories, costumes, collectibles, home décor, toys,

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and games based on characters and concepts from its programming.

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TIME, INC.
Time magazine was founded in 1923 by Briton Hadden and Henry Luce. It was America’s
first weekly news magazine, and by the 1960s Time, Inc. was the largest magazine publisher
in the world. In 2014 Time, Inc. represented 96 magazine brands that were distributed via
print, online, and mobile devices (including tablet versions). Always interested in new media

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forms, Time, Inc. bought American Television and Communications Corp. from its founders
in 1978. Following the merger of Time-Life, Inc. with Warner Communications, its HBO
business was carved out as a separate division while its American Television and
Communications Corp. went to Time Warner Cable in 1989 when Warner-Amex was also
folded into Time Warner’s cable system operations.

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Time Warner’s Management Systems
Following the example of Steven Ross’ hands-off management style, 8 most Time Warner
divisions operated independently of each other—using market indicators of demand for the
content and services of sister businesses to determine when to distribute their content
through owned conduits instead of through outsiders. Requests for “special cooperation”
among the divisions were generally resisted as no business unit wished to subsidize the
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losses of another business unit.
The corporate resources and services of Time Warner were quite similar to the other media
firms who were its competitors in 2014. The corporate office performed minimal
headquarters activities, such as managing investor relations, lobbying the FCC for
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concessions that would improve the profitability potential of its lines of business, and
providing a headquarters building in New York City. Otherwise, Time Warner made no
particular contributions to its lines of business; it provided few shared corporate services to
and enforced few shared transactions between its lines of business. Each business unit
operated within its own silo and transacted business with sister business units at its
discretion. Arm’s length transactions governed relationships between them.
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DIVESTING TIME, INC.

Early in 2013, in the face of the continuing decline of the print media business, Time Warner
announced that it was in negotiations to sell some of the publications of Time, Inc. to Iowa-
based Meredith Corp., a media company whose holdings included magazines and local
television stations. 9 When the two parties could not agree on a transaction, Time Warner
announced its intention to spin off all of Time, Inc. as an independent company.
When Time, Inc. and Warner Communications joined forces in 1990, their expected synergies
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were driven by advertising expenditures. (By 2014 the marketing budgets that were typically
being spent on magazine and other print media outlets had not grown; a new and
compelling reason to persuade customers to increase advertising budgets was needed.)
Originally Time Warner had wanted to bundle the sale of advertising space in Time, Inc.’s
magazines with the sale of advertising spots on other forms of media as its competitors were
doing, 10 but their envisioned synergy from combining advertising revenues from print, film,

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 television, and records was not realized. 11 Small cross-media projects were undertaken, e.g.,

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promotional advertisements for Time Warner’s newly-released movies were inserted with

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billings for magazine subscriptions. Time, Inc.’s database list of direct-marketing customers
was used to sell books and DVDs related to the airing of special event entertainment
programming. Time Warner Direct even tried selling cartoon programming and comics
through its direct-mail book series for children. But that was the extent of their operating
synergies.

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Critics later complained that the few joint advertising projects that had been touted as shared
victories by Time Warner could have been done successfully by either Time, Inc. or Warner
Brothers alone. Media analysts always remained skeptical about the allegation that synergies
were enjoyed among the fiercely-independent Time Warner media companies. Newsday
called for Time Warner to leave print publishing as early is 1992. 12 During the dot-com
revolution Time, Inc. had been struggling with the shift from print to the Internet, where

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advertising commanded lower rates. Finally in 2013 Time Warner’s leaders were ready to
divest Time, Inc.
In November 2013 Time, Inc. announced a reorganization made in anticipation of the
impending spin-off that would have the editors of the firm’s individual magazines report to
an executive vice president and chief of content (business manager) instead of to an editor-
in-chief (journalism manager). The organizational change was billed as being necessary to
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encourage innovation to occur more rapidly within Time, Inc. by encouraging collaboration
across publication lines. Time, Inc. also recruited a chief technology officer from
Amazon.com to shape its technology strategy—in a newly created executive position. 13
Implied in these organizational changes was the suggestion that financial considerations
would loom larger in future decisions concerning how Time, Inc. would utilize its resources
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within a media industry that was facing rapidly-changing contours and profitability
potential. Time, Inc. began the process of developing a larger vision of what its brands could
become by acquiring the American Express Publishing Corporation that had luxury print
brands including Travel + Leisure and Food & Wine, among other magazines and branded
books, digital properties, social media platforms, membership clubs, retail stores, and more
than a hundred events and experiences. 14 In conjunction of that acquisition Time, Inc. laid off
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500 employees (representing about 6% of Time, Inc.’s 7,800 workers worldwide) and hinted
that the company could move from its headquarters at the Time Life Building to a location in
south Manhattan. 15
Time, Inc. made a deal with Flipboard—which had a digital footprint of 68 million users
across desktops, smartphones, and tablets—to distribute its publications online. Time
magazine and Fortune were scheduled to be its first titles to be launched on Flipboard’s
platform. 16 Time, Inc. teamed up with Major League Baseball’s digital arm, the National
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Hockey League, the National Basketball Association, and NASCAR to form 120 Sports—a
24-hour sports network that would stream sports information to subscribers. 17
It was rumored that the planned spin-off of Time, Inc. would give shareholders of Time
Warner all of the stock in the new publicly-traded company. It was believed that Time
Warner would lay off $1.3 billion in debt on the balance sheet of Time, Inc. and take a charge

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 of $150 million in restructuring charges against its 2014 earnings. 18 A one-time, special-

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purpose dividend was likely to be paid to shareholders. Critics questioned the motivations of

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the intended divestiture by asking questions similar to those that accompanied the
divestiture of Motorola’s cell phone business: was the divestiture strategic in nature or was it
yet another “corporate cleansing” event that was intended to raise the valuation of Time
Warner’s shares?

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No
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 Exhibits

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Exhibit 1

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Time Warner Inc. Income Statement (2009 – March 2014) (USD)
Restated Restated LTM
12 months Reclassified Reclassified 12 months 12 months 12 months
Dec-31- 12 months 12 months Dec-31- Dec-31- Mar-31-
For the Fiscal Period Ending 2009 Dec-31-2010 Dec-31-2011 2012 2013 2014

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Revenue 24,680.0 26,275.0 28,274.0 27,950.0 28,945.0 29,551.0
Other Revenue 708.0 613.0 700.0 779.0 850.0 850.0
Total Revenue 25,388.0 26,888.0 28,974.0 28,729.0 29,795.0 30,401.0
Cost Of Goods Sold 14,046.0 14,945.0 16,237.0 15,842.0 16,179.0 16,563.0
Gross Profit 11,342.0 11,943.0 12,737.0 12,887.0 13,616.0 13,838.0
Selling General & Admin Exp. 6,073.0 6,131.0 6,397.0 6,254.0 6,382.0 6,416.0
R & D Exp. - - - - - -
Depreciation & Amort. - - - - - -
Amort. of Goodwill and Intangibles 280.0 264.0 269.0 248.0 251.0 260.0

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Other Operating Expense/(Income) - - - - - -
Other Operating Exp., Total 6,353.0 6,395.0 6,666.0 6,502.0 6,633.0 6,676.0
Operating Income 4,989.0 5,548.0 6,071.0 6,385.0 6,983.0 7,162.0
Interest Expense (1,304.0) (1,277.0) (1,321.0) (1,360.0) (1,283.0) (1,295.0)
Interest and Invest. Income 138.0 99.0 111.0 107.0 93.0 129.0
Net Interest Exp. (1,166.0) (1,178.0) (1,210.0) (1,253.0) (1,190.0) (1,166.0)
Income/(Loss) from Affiliates (32.0) 6.0 (79.0) (183.0) (152.0) (93.0)
Currency Exchange Gains (Loss) - - - (10.0) 19.0 0
Other Non-Operating Inc. (Exp.) (13.0) 1.0 (18.0) 9.0 (26.0) (6.0)
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EBT Excl. Unusual Items 3,778.0 4,377.0 4,764.0 4,948.0 5,634.0 5,897.0
Restructuring Charges (212.0) (125.0) (133.0) (201.0) (295.0) (357.0)
Merger & Related Restruct.
- - (14.0) (10.0) (21.0) (27.0)
Charges
Impairment of Goodwill - 59.0 - - 113.0 113.0
Gain (Loss) On Sale Of Invest. (21.0) 32.0 (136.0) (14.0) 51.0 (25.0)
Gain (Loss) On Sale Of Assets (33.0) - - (26.0) 10.0 456.0
Asset Writedown (274.0) (78.0) (118.0) (278.0) (191.0) (228.0)
Legal Settlements - 36.0 (8.0) (3.0) - -
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Other Unusual Items (1.0) (382.0) 4.0 32.0 2.0 (2.0)

EBT Incl. Unusual Items 3,237.0 3,919.0 4,359.0 4,448.0 5,303.0 5,827.0
Income Tax Expense 1,153.0 1,348.0 1,477.0 1,526.0 1,749.0 1,735.0
Earnings from Cont. Ops. 2,084.0 2,571.0 2,882.0 2,922.0 3,554.0 4,092.0
Earnings of Discontinued Ops. 428.0 - - - 137.0 137.0
Extraord. Item & Account. Change - - - - - -
Net Income to Company 2,512.0 2,571.0 2,882.0 2,922.0 3,691.0 4,229.0
Minority Int. in Earnings (35.0) 7.0 4.0 3.0 - -
Net Income 2,477.0 2,578.0 2,886.0 2,925.0 3,691.0 4,229.0
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Pref. Dividends and Other Adj. 9.0 13.0 15.0 18.0 16.0 16.0
NI to Common Incl Extra Items 2,468.0 2,565.0 2,871.0 2,907.0 3,675.0 4,213.0
NI to Common Excl. Extra Items 2,040.0 2,565.0 2,871.0 2,907.0 3,538.0 4,076.0
Per Share Items
Basic EPS $2.08 $2.27 $2.74 $3.05 $3.99 $4.63
Basic EPS Excl. Extra Items 1.72 2.27 2.74 3.05 3.85 4.48
Weighted Avg. Basic Shares Out. 1,184.0 1,128.4 1,046.2 954.4 920.0 909.6
Diluted EPS $2.07 $2.25 $2.71 $3.0 $3.92 $4.54
Diluted EPS Excl. Extra Items 1.71 2.25 2.71 3.0 3.77 4.39
Weighted Avg. Diluted Shares Out. 1,195.1 1,145.3 1,064.5 976.3 942.6 931.2
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Normalized Basic EPS $1.96 $2.43 $2.85 $3.24 $3.83 $4.05

Normalized Diluted EPS 1.95 2.39 2.8 3.17 3.74 3.96
Dividends per Share $0.75 $0.85 $0.94 $1.04 $1.15 $1.18
Payout Ratio % 36.2% 37.7% 34.5% 34.6% 29.1% 25.7%
Source: S & P Capital IQ

Time Warner Restructures | Page 10

BY KATHRYN
This document is authorized for educator review use only by Vandana Sonwaney, Symbiosis Institute of Operations Management, RUDIE
SIOM Nashik HARRIGAN*
until Jun 2020. Copying or posting is an
infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860
 Exhibit 2

t
Time Warner Inc. Balance Sheet (2009 – March 2014) (USD)

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Restated Restated Restated
Dec-31- Dec-31- Dec-31- Dec-31- Dec-31- Mar-31-
2009 2010 2011 2012 2013 2014
ASSETS
Cash And Equivalents 4,733.0 3,663.0 3,476.0 2,841.0 1,862.0 3,546.0
Total Cash & ST Investments 4,733.0 3,663.0 3,476.0 2,841.0 1,862.0 3,546.0

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Accounts Receivable 5,875.0 6,596.0 6,922.0 7,385.0 7,868.0 7,371.0
Total Receivables 5,875.0 6,596.0 6,922.0 7,385.0 7,868.0 7,371.0
Inventory 1,769.0 1,920.0 1,890.0 2,036.0 2,028.0 1,879.0
Prepaid Exp. 548.0 458.0 346.0 449.0 562.0 597.0
Deferred Tax Assets, Curr. 670.0 581.0 663.0 474.0 447.0 512.0
Other Current Assets 97.0 103.0 135.0 79.0 77.0 89.0
Total Current Assets 13,692.0 13,321.0 13,432.0 13,264.0 12,844.0 13,994.0
Gross Property, Plant & Equipment 7,654.0 8,043.0 8,466.0 8,766.0 9,014.0 -

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Accumulated Depreciation (3,732.0) (4,169.0) (4,503.0) (4,824.0) (5,189.0) -
Net Property, Plant & Equipment 3,922.0 3,874.0 3,963.0 3,942.0 3,825.0 3,219.0
Long-term Investments 997.0 1,249.0 1,229.0 1,357.0 1,379.0 2,117.0
Goodwill 29,639.0 29,994.0 30,029.0 30,446.0 30,563.0 30,568.0
Other Intangibles 6,775.0 8,821.0 8,717.0 8,643.0 8,591.0 8,555.0
Other Long-Term Assets 11,034.0 9,448.0 10,431.0 10,437.0 10,792.0 9,746.0
Total Assets 66,059.0 66,707.0 67,801.0 68,089.0 67,994.0 68,199.0
LIABILITIES
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Accounts Payable 677.0 846.0 961.0 771.0 693.0 643.0
Accrued Exp. 3,668.0 3,498.0 3,428.0 3,574.0 3,462.0 2,912.0
Curr. Port. of LT Debt 862.0 26.0 23.0 749.0 56.0 65.0
Curr. Port. of Cap. Leases - - - - 10.0 -
Curr. Income Taxes Payable 129.0 248.0 347.0 486.0 159.0 513.0
Unearned Revenue, Current 781.0 991.0 1,084.0 1,011.0 995.0 951.0
Other Current Liabilities 3,356.0 3,217.0 3,079.0 3,208.0 3,008.0 3,194.0
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Total Current Liabilities 9,473.0 8,826.0 8,922.0 9,799.0 8,383.0 8,278.0

Long-Term Debt 15,346.0 16,523.0 19,501.0 19,122.0 20,043.0 20,226.0
Capital Leases - - - - 56.0 -
Unearned Revenue, Non-Current 269.0 296.0 549.0 523.0 482.0 458.0
Pension & Other Post-Retire.
582.0 565.0 809.0 1,058.0 733.0 728.0
Benefits
Def. Tax Liability, Non-Curr. 1,607.0 1,950.0 2,541.0 2,127.0 2,642.0 2,461.0
Other Non-Current Liabilities 5,385.0 5,602.0 5,525.0 5,663.0 5,751.0 6,004.0
No

Total Liabilities 32,662.0 33,762.0 37,847.0 38,292.0 38,090.0 38,155.0

Common Stock 16.0 16.0 17.0 17.0 17.0 17.0
Additional Paid In Capital 158,129.0 157,146.0 156,114.0 154,577.0 153,410.0 152,988.0
Retained Earnings (97,135.0) (94,557.0) (91,671.0) (88,732.0) (85,041.0) (83,749.0)
Treasury Stock (27,034.0) (29,033.0) (33,651.0) (35,077.0) (37,630.0) (38,337.0)
Comprehensive Inc. and Other (580.0) (632.0) (852.0) (989.0) (852.0) (875.0)
Total Common Equity 33,396.0 32,940.0 29,957.0 29,796.0 29,904.0 30,044.0
Minority Interest 1.0 5.0 (3.0) 1.0 - -
Total Equity 33,397.0 32,945.0 29,954.0 29,797.0 29,904.0 30,044.0
Total Liabilities And Equity 66,059.0 66,707.0 67,801.0 68,089.0 67,994.0 68,199.0
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Source: S & P Capital IQ

Page 11 | Time Warner Restructures

BY KATHRYN
This document is authorized RUDIE
for educator HARRIGAN*
review use only by Vandana Sonwaney, Symbiosis Institute of Operations Management, SIOM Nashik until Jun 2020. Copying or posting is an
infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860
 Exhibit 3

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Time Warner Inc. Cash Flows (2009 – March 2014) (USD)

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Restated Restated LTM
12 months 12 months 12 months 12 months 12 months 12 months
For the Fiscal Period Ending Dec-31-2009 Dec-31-2010 Dec-31-2011 Dec-31-2012 Dec-31-2013 Mar-31-2014
Net Income 2,477.0 2,578.0 2,886.0 2,925.0 3,691.0 4,229.0
Depreciation & Amort. 668.0 674.0 653.0 644.0 635.0 635.0

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Amort. of Goodwill and Intangibles 280.0 264.0 269.0 248.0 251.0 260.0
Depreciation & Amort., Total 948.0 938.0 922.0 892.0 886.0 895.0
Other Amortization 6,403.0 6,060.0 7,032.0 7,210.0 7,262.0 7,427.0
(Gain) Loss On Sale Of Invest. 49.0 (6.0) 136.0 26.0 (65.0) (444.0)
Asset Writedown & Restructuring Costs 85.0 20.0 44.0 186.0 140.0 151.0
(Income) Loss on Equity Invest. 74.0 38.0 134.0 225.0 218.0 162.0
Stock-Based Compensation 175.0 199.0 225.0 234.0 256.0 241.0
Net Cash From Discontinued Ops. 6,635.0 (24.0) (16.0) (34.0) (2.0) (2.0)

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Other Operating Activities (47.0) 82.0 124.0 (153.0) 622.0 (31.0)
Change in Acc. Receivable 309.0 (645.0) (613.0) (360.0) (366.0) (366.0)
Change In Inventories (6,760.0) (6,436.0) (7,624.0) (7,566.0) (7,194.0) (7,194.0)
Change in Acc. Payable (742.0) 177.0 167.0 (66.0) (492.0) (492.0)
Change in Other Net Operating Assets 415.0 309.0 15.0 (77.0) (1,242.0) 113.0
Cash from Ops. 10,021.0 3,290.0 3,432.0 3,442.0 3,714.0 4,689.0
Capital Expenditure (547.0) (631.0) (772.0) (643.0) (602.0) (616.0)
Cash Acquisitions (283.0) (370.0) - (170.0) - -
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Divestitures - - - - - -
Invest. in Marketable & Equity Securt. (235.0) (435.0) (314.0) (433.0) (308.0) 783.0
Net (Inc.) Dec. in Loans Originated/Sold - - - - - -
Other Investing Activities 8,490.0 - - - - -
Cash from Investing 7,425.0 (1,436.0) (1,086.0) (1,246.0) (910.0) 167.0
Short Term Debt Issued - - - - - -
Long-Term Debt Issued 3,583.0 5,243.0 3,037.0 1,039.0 1,028.0 -
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Total Debt Issued 3,583.0 5,243.0 3,037.0 1,039.0 1,028.0 1,151.0

Short Term Debt Repaid - - - - - -
Long-Term Debt Repaid (10,068.0) (4,924.0) (92.0) (697.0) (771.0) -
Total Debt Repaid (10,068.0) (4,924.0) (92.0) (697.0) (771.0) (339.0)
Issuance of Common Stock 56.0 121.0 204.0 1,107.0 674.0 451.0
Repurchase of Common Stock (1,158.0) (2,016.0) (4,611.0) (3,272.0) (3,708.0) (4,027.0)
Common Dividends Paid (897.0) (971.0) (997.0) (1,011.0) (1,074.0) (1,088.0)
Total Dividends Paid (897.0) (971.0) (997.0) (1,011.0) (1,074.0) (1,088.0)
No

Special Dividend Paid - - - - - -

Other Financing Activities (5,311.0) (377.0) (74.0) 3.0 68.0 49.0
Cash from Financing (13,795.0) (2,924.0) (2,533.0) (2,831.0) (3,783.0) (3,803.0)

Net Change in Cash 3,651.0 (1,070.0) (187.0) (635.0) (979.0) 1,053.0

Source: S & P Capital IQ

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Time Warner Restructures | Page 12

BY KATHRYN
This document is authorized for educator review use only by Vandana Sonwaney, Symbiosis Institute of Operations Management, RUDIE
SIOM Nashik HARRIGAN*
until Jun 2020. Copying or posting is an
infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860
 Endnotes

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1 Time, Inc. bought Warner Communications Inc. for approximately $14 billion in 1989.
Simultaneously, Paramount Communications tried to acquire Time, Inc. through a $10.7 billion hostile
tender offer. Time, Inc.’s cable subsidiary, American Television & Communications, filed suit to
stymie Paramount’s tender offer for Time, Inc. by noting that such change in control without prior
regulatory approval would be illegal because it violated franchise agreements with the municipalities

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that it served.
2 The FCC required AOL Time Warner to enable at least three rival instant messaging services to

interact with its own wildly-popular version of ICQ—but only at the point when its service reached an
advanced stage and was able to transmit video conferencing or other streaming video over its cable
lines. No restrictions were made concerning the use of the Netscape browser (owned by AOL).
3 Time Warner expected to deliver its branded programming—movies, music, magazines, and

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books—via Time Warner Cable’s high-speed cable lines to AOL’s many subscribers. The merger was
touted as a way to spark a flood of cross-promotions among Internet, magazine, TV, movie, music,
and other media units.
4 AOL had 26 million dial-up subscribers plus three million CompuServe users. AOL’s market share

was five times larger than the next biggest competitor, EarthLink. High-speed Internet service was
among the most attractive synergies that AOL saw from the merger with Time Warner since it
intended to convince cable-system operators to use its Internet access service.
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5 S. Salmans, “A Limping Warner Amex,” New York Times, September 13, 1983, page D-1.

6 Steven J. Ross ultimately sold Showtime, The Movie Channel, and MTV to Viacom in 1985 for $510

million—leaving the cable operations as the undervalued stub from the Warner-Amex joint venture.
The cable operations (valued at about $1.6 billion) were folded into Warner Cable. Ross was the single
largest beneficiary of the Time Warner merger.
7 K. Auletta, “The Next Corporate Order: American Keiretsu,” New Yorker, October 20, 1997, p. 225-
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228.
8 Steven J. Ross, the deal-maker behind the combination of Time, Inc. and Warner Communications,

attracted great managers and left them alone to run their fiefdoms. Ross’s first big deal was the
creation of Kinney Service, a mini-conglomerate that included funeral homes, car rentals, parking lots,
and office maintenance service businesses. Except for opportunistic instances when its business units
cooperated with each other to create temporary market advantage, the dominant organizational
arrangements of Time Warner were laissez-faire in nature.
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9 A. Chozick, “Time Warner Plans Magazine Unit Spinoff,” International Herald Tribune (Paris), March

8, 2013, p. 16.
10 In 1990 Rupert Murdoch’s News Corporation offered advisers space in TV Guide packaged with time

on its Fox television network. Capital Cities/ABC could promote ABC’s soap opera programming in a
special magazine produced by its publishing division.
11 R. Rothenberg, “The Media Business: Time Warner’s Merger Payoff,” New York Times, December 31,

1990, p. 1.29.
12 A. Sloan, “There’s No Magic to Time Warner,” Newsday, (Nassau and Suffolk Edition), March 1,
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1992, p. 80.
13 “Time, Inc. Names Colin Bodell Executive Vice President and Chief Technology Officer,” Business

Wire, January 14, 2014.

14 “Time, Inc. and American Express Reach Agreement for Time, Inc. to Acquire American Express

Publishing,” Business Wire, September 10, 2013.

15 W. Launder, “Time, Inc. to Cut Another 500 Positions,” Wall Street Journal, February 5, 2014, p. 19.

Page 13 | Time Warner Restructures

BY KATHRYN
This document is authorized RUDIE
for educator HARRIGAN*
review use only by Vandana Sonwaney, Symbiosis Institute of Operations Management, SIOM Nashik until Jun 2020. Copying or posting is an
infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860
 t
16 “Time, Inc. Inks Deal With Flipboard,” PR Newswire, October 31, 2013.

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17 K. Whitehouse, “More Than a Game: Time, Inc., Leagues' Video App,” New York Post, February 21,
2014, p. 33.
18 K. J. Kelly, “‘Spun’ Debt of $1.3B,” New York Post, February 6, 2014, p. 34.

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No
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Time Warner Restructures | Page 14

BY KATHRYN
This document is authorized for educator review use only by Vandana Sonwaney, Symbiosis Institute of Operations Management, RUDIE
SIOM Nashik HARRIGAN*
until Jun 2020. Copying or posting is an
infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860