The American Spectator

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The Investor

Steve Case was once considered one of the coolest guys in the world. He built, practically from the ground up, the 800-pound gorilla of the Internet, America Online. The company made giant stock profits for millions of investors. Even Al Haig and Colin Powell ended up with millions in AOL dough, as a result of taking positions as directors in 1989 and 1998, respectively.

The wave receded as soon as AOL and Time Warner announced their merger on January 10, 2000. Amid all the glad handing and talk about synergy and the Twenty-First Century was the chilling blessing delivered by Ted Turner, Time Warner's largest shareholder: "I have not been so excited since the first time I had sex 42 years ago." Count on Ted to creep everybody out no matter the occasion.

Then the whole Internet Revolution -- according to the stock market -- collapsed, and AOL Time Warner followed it.

For a rich guy, Steve Case now has a lot of headaches. The merged company, AOL Time Warner, has lost two-thirds of its value since the merger, and everybody blames AOL. The corporation has purged most of Case's old management team. He's got a crazy man in his face -- the lusty Mr. Turner -- screaming that Case cost him billions of dollars. AOL Time Warner had to restate AOL's old financial results and the SEC is investigating.

Worst of all, Case is now a charter member of Fortune's "The Greedy Bunch," a list of executives who made hundreds of millions of dollars selling their companies' stocks before they tanked. I suppose getting trashed goes with the territory, but Case is Chairman of the company that owns Fortune.

Excuse me for feeling bad for a guy who made $450 million, but I think Steve Case is getting the proverbial homemade cupcake in his Halloween bag. Case is an example of capitalism's greatest attributes -- commerce, innovation, reward for success, generating wealth for many -- and something bad is going to happen to the whole show if we start assuming anyone who makes a fortune is doing something wrong.

First, Steve Case has enriched the lives of millions of people. It's fun for the Internet know-it-alls to trash AOL, but the whole country learned about the Internet from AOL, still accesses the Internet through AOL, and benefits in more ways than it can count. In fact, where would the Internet be without Case? Some businesses and students would be using it by now, but the whole world would not be e-mailing each other or getting news and information in real time.

Second, Steve Case is the best friend investors ever had. He built AOL into the hottest company in the world, then turned that into a controlling position in one of the world's largest media companies, Time Warner. In the merger, AOL's shareholders, in effect, gave up 45% of what they had to get 55% of what Time Warner's shareholders had. In exchange for a bunch of people chatting, surfing the web, and exchanging e-mail, AOL shareholders got a controlling interest in Warner Brothers, HBO, CNN, TBS, the Atlanta Braves, a huge cable system, a leading music producer, Time, People, Sports Illustrated, and a bunch of other extremely desirable assets.

Where do you think AOL investors would be today without that merger? Immediately before, AOL's market value was $160 billion. In January 2001, when the merger was completed, those investors owned 55% of a combined company with a market value of $190 billion.

Yikes! That means they lost market value of $60 billion during the year. But remember, 2000 was not a good year to be an Internet company. How did Yahoo! investors make out during that same period? Yahoo! had a market value of $150 billion, about the same as AOL's, at the beginning of 2000. Without a merger, the market value of Yahoo! plummeted to $20 billion at the beginning of 2001.

Since the deal, AOL Time Warner stock has fallen further. Those AOLers' 55% of the combined company is now worth about $35 billion. Yahoo! is now worth just $9 billion.

Third, Steve didn't do anything wrong by exercising options on a million shares and selling back in February 2001. Anybody who didn't like that he was selling could have gotten out for the same price. In fact, in April 2001, Fortune ran an article publicizing the sale, titled "Do the Big Guns Know Something You Don't?" For most of June and July 2001, AOL Time Warner stock traded at or above the price at which Case sold.

But let's not even jump to conclusions that he did anything wrong. While the merger was pending, Case was probably prohibited from selling shares. That was a whole year. I'm sure Case could pay down his Visa bill without the $450 million from selling the stock, but what's the fun in being a billionaire if you never get to see any of the money? The other AOL honchos were doing things like buying sports teams or becoming Secretary of State. Doesn't Steve deserve anything for all his work?

As an entrepreneur, you can't blame Case for selling some stock, either. He got the "chairman" title, but he was no longer in control of the business. When they put you out to pasture after you built the company from the ground up, you are entitled to take a few dollars off the table.

And it was only a few dollars. Case exercised options on a million shares. According to the January 2002 proxy statement, he still has 11.4 million shares and 18.3 million options. In fact, Case is probably the only guy on the planet who is getting heat for not overextending himself chasing the Internet Bubble. Someone just complained to me the other day about having a friend who built his retirement money from $2 million to $40 million on Internet stocks, refused to sell anything, refused to pay down his margin, and lost it all.

For the clincher, isn't there something inherently good about someone who can piss off Ted Turner like that, especially after Turner was, literally and figuratively, drooling about what a wonderful deal he was getting? It's gotta be like telling Ted that Jane Fonda was really a guy.

I'm going to call Steve and see if he's up for egging Turner's house. Let me know if you want to join us.

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