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With Case out, Parsons seen as likely chairman

With Steve Case set to leave as chairman of AOL Time Warner in May, industry observers said Monday that CEO Richard Parsons was the front-runner to further consolidate his power base and take on the additional chairman title.

However, with Case gone as a scapegoat for investor gripes, Parsons must produce proof of a turnaround at the ailing America Online unit or else risk becoming a target for angry investors, they said.

“He’s now the man in charge with no one to blame,” said Hal Vogel, head of media investment firm Vogel Capital Management. “He’ll get to take the praise or the criticism.”

An AOL TW spokeswoman Monday couldn’t say who might be named the new chairman and by when. “The board will address the issue… in due course,” she said but couldn’t say whether both internal and external candidates will be considered.

Company observers predicted that the chairman issue would first be brought up at a regularly scheduled board meeting Thursday, with a Case successor named by the company’s annual shareholder meeting in May. Also, most observers called Parsons the most logical pick.

“They’ll pick Parsons to streamline management and have a cleaner (power) structure” with one executive functioning as both CEO and chairman, one source close to the company said.

Some observers suggested that AOL TW vice chairman Ted Turner, who had been one of Case’s toughest critics, could step up and win the board chairmanship. Through a spokesman, Turner on Monday declined comment on the issue.

However, analysts said his chances were limited. “Turner is very vocal and tends to be somewhat controversial,” First Albany Corp.’s Youssef Squali said. “I don’t think AOL TW wants that” kind of a person as chairman at this time.

Merrill Lynch analyst Jessica Reif Cohen suggested a scenario that caught people’s attention but was described by many as unlikely. While AOL TW has deep management benches, Case’s departure “conceivably would open the door for strong outside management – e.g. Mel Karmazin as CEO – should Dick Parsons become chairman,” she said.

Karmazin is in the midst of contract renewal talks with AOL TW competitor Viacom, where he will serve as president and chief operating officer until year’s end under his current contract.

A spokeswoman for Viacom declined “comment on speculation.” And an AOL TW spokeswoman also wouldn’t speculate on Karmazin’s chances or interest.

Squali said he doubted there would be a big management reshuffle. “Any change in general structure of management (at AOL TW) would only bring more confusion,” he said.

Added James Goss, analyst at Barrington Research Associates: “Parsons just became CEO recently, so I don’t think he’d give up that job so soon.” He called the CEO the likeliest chairman candidate, though other sectors and companies have tended to separate the two top corporate positions.

No matter who ends up with the chairman post, observers said the big Case critics among directors and shareholders had won a victory late Sunday with Case’s resignation. Those critics include Turner; Liberty Media chairman John Malone, who through Liberty owns about 4% of AOL TW; and Gordon Crawford, from investment firm Capital Research & Management Co.

Malone and Crawford could not be reached for comment, and Turner only commented in general terms. “I admire Steve Case’s decision to put our company and its employees first and am delighted that he will remain on the board and be active because, frankly, we really need his experience and vision,” he said in a statement.

Analysts Monday called Case’s departure decision was not as surprising as its timing was. Some said they had expected Case, who has been blamed by many investors for early failures of the merged AOL TW, to stay on the board at least until the fall.

Sources close to the situation said Case made up his mind without pressure from company executives late Friday before informing Parsons on Saturday. “I think he wanted to leave on his timing and his terms,” one source said.

Analysts lauded Case’s exit as a way to end investor criticism and debate about his future, though it will not change the conglomerate’s fundamentals. “While we do not expect this (management) change to have a material effect on AOL TW’s day-to-day operations, we do believe that this move may help ameliorate some investors,” JP Morgan analyst Spencer Wang said.

AOL TW shares reversed bigger early gains to close up 1% at 15.03. Credit Suisse First Boston analyst Bill Drewry predicted any stock gain would be “temporary” given that “the overall AOL TW outlook is still mixed.”

Sources close to the situation discounted the notion that Case had decided to resign because he didn’t believe in a turnaround of the AOL unit. “He just didn’t have the stomach to go through all the media drumbeats leading up to the shareholder meeting in May” and a vote about his chairmanship there, one source said.

The same person suggested that Case also hoped to boost AOL TW shares, of which he still owns a substantial portion.

Sources familiar with the situation said Case had no official work contract and would not receive any severance. He did, however, own 11.5 million AOL TW shares plus 18.3 million stock options as of March, according to a regulatory filing made then. At the current stock price, his outright stock alone would be worth $172.5 million.

While AOL TW shareholders have seen their stock fall more than 80% since the merger, Reif Cohen said Monday that “from a premerger AOL shareholder perspective, Steve Case did an exceptional job for shareholders” given that a pure-play Internet firm would face challenges to survive today.

In a memo to employees, Parsons also lauded Case. “Both as chairman of AOL TW and as the guiding genius behind AOL, Steve is the author of a historic chapter in global communications,” he said. “Steve’s extraordinary vision and unique experience will remain important assets to our entire company.”

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