AOL-Time Warner marriage is breaking up

Time Warner twx said Thursday that it will spin off AOL by year-end, bringing to an end the famously troubled merger of old and new media unveiled with great fanfare just days after the beginning of the new millennium.

The separation, turning AOL into a stand-alone public company, will mean that "AOL can operate with more focus and strategic flexibility in terms of getting partnerships (with) other companies," Time Warner CEO Jeff Bewkes told shareholders at the company's annual meeting.

It also will give investors the opportunity to make a choice.

Time Warner will become a pure entertainment and information power with strengths in film and TV production, TV networks and magazine publishing. In March it spun off Time Warner Cable, the No. 2 systems operator after Comcast.

"The good news is that Bewkes is biting the bullet," says John Tinker, managing director of merchant bank Ledgemont Capital. "Time Warner is back to its roots with assets that he's comfortable with and has been successful with."

And AOL, which will be run by Tim Armstrong — who was recently hired from Google— is an Internet company in transition.

Over the last few years, AOL has worked feverishly to reduce its dependence on paid subscriptions to its dial-up Internet service. That has been falling fast, to 6.3 million subscribers at the end of the first quarter, as consumers switch to speedier broadband providers. AOL gives its software and e-mail service to broadband subscribers.

To replace the lost business, AOL has built a portfolio of ad-supported online destinations that includes MapQuest, Moviefone, Black Voices, Truveo, Engadget, BloggingStocks and AOL Music.

Armstrong says that no decision has been made on what will happen to gossip site TMZ.com, which is jointly owned by AOL and Warner Bros.

"AOL is a marketing company focused on building a brand, and its brand is a pretty good one," says Christopher Dixon, managing director of media investments at money management firm GGCP. "It's had problems. But Armstrong's got something he can build from and a lot more flexibility than he does under the roof of Time Warner."

Time Warner says that it will buy Google's 5% stake in AOL. That way Time Warner shareholders will own 100% of AOL after the spinoff, which will be structured to be tax-free to shareholders.

Although financial details have yet to be decided, and Time Warner has long indicated that it might spin off AOL, shareholders seemed to like the news. Time Warner shares closed at $23.55, up 2.4%.

When then-CEO Gerald Levin announced the planned merger with AOL in 2000, the height of the first Internet boom, Time Warner's then-vice chairman Ted Turner called the proposal "better than sex." But company shares have declined more than 86% since those heady days, while the benchmark Standard & Poor's 500 fell just 40%.

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