M&A

Time Warner Expands Internal Probe

The investigation centers on a series of transactions that occurred around the time of its 2001 merger with America Online.
Ed ZwirnJuly 30, 2004

Time Warner Inc. announced that it has expanded an internal investigation of accounting at America Online to include AOL’s European unit, which could result in a restatement of financials, according to the Washington Post.

The investigation centers on a series of transactions that occurred around the time of the 2001 merger of America Online and Time Warner, and on how AOL accounted for losses at its European division, the paper added. Time Warner’s purchase of AOL Europe, which followed in 2002, has been the target of an investigation by the Securities and Exchange Commission, reported Reuters.

A recent Business Week article reported that in late 2000, Goldman Sachs purchased a 1 percent stake in AOL Europe. The deal included a “put” that allowed Goldman to sell back its stake by a specific date and at a set price.

The arrangement worked for AOL Europe’s parents, America Online and Bertelsmann, which had each owned 50 percent. Bertelsmann could satisfy the antitrust concerns of the European Commission by reducing its holding, wrote Business Week, and America Online would not need to consolidate AOL Europe’s losses on its own balance sheet immediately before the merger.

As the merger moved toward consummation, the Goldman arrangement was not disclosed in public documents to AOL or Time Warner shareholders, added the magazine. Time Warner did not merge AOL Europe’s figures until 2002, when it bought Bertelsmann’s remaining 49.5 percent.

According to Reuters, Time Warner had stood by its accounting for AOL Europe but may now reconsider, based on discussions with the SEC. The commission is also investigating advertising transactions at the U.S. online division, the wire service added.

If Time Warner’s decision to investigate is “driven by a desire to make voluntary disclosure,” said former SEC enforcement lawyer Jacob Frenkel, according to Reuters, “it may be too late to get credit because of how long this issue has been in play.”