Dialing Up a Departure

By Lisa Takeuchi Cullen

It was Saturday morning, and Dick Parsons was working out on the exercise equipment in his Manhattan apartment when he got the message. Steve Case, chairman of AOL Time Warner, wanted to talk right away. Parsons, the company's chief executive, finished his regimen, then returned the call. "Are you sitting down?" Case asked. Then he unleashed the news: he was resigning.

Parsons, 54, was surprised, especially by the timing. Everyone knew that some big shareholders, led by vice chairman Ted Turner and his friend Gordon Crawford of Capital Research and Management, wanted Case out. But Parsons had thought Case, 44, would fight to hang on--and was relieved that Case had suddenly changed his mind. "I commended him on his decision," Parsons told TIME, "which he made in the best interests of the company."

The company (which owns TIME) can use all the help it can get. Ever since Case, then head of AOL, and Gerald Levin, then chief of Time Warner, agreed two years ago to complete the $106 billion deal in which the online upstart bought the old-media giant, their union has produced a Shakespearean torrent of pain and recrimination. As the Internet bubble burst and advertising slid into recession, the company's executives were slow to adjust their lavish profit-growth promises to Wall Street, which struck back hard. Having tumbled from a high of $56.60, the price of AOL Time Warner's widely held stock stood at $14.81 at the end of last week, representing an almost $200 billion collapse of shareholder wealth. Levin was forced out. So was chief operating officer Bob Pittman, who had come from AOL. And now goes Case himself.

In the days after Case's resignation, speculation arose that some outside stockholders were trying to force the company to bring in Viacom president Mel Karmazin, but no one could produce evidence that anyone in charge at AOL had spoken with him. Instead, the AOL board acted swiftly to elect Parsons as both chairman and CEO, strengthening his hand as he takes on one of the toughest turnaround tasks in corporate America.

Over the next year or so, Parsons must manage AOL Time Warner's $26 billion in debt to avoid a downgrade in the company's credit rating. He plans to spin off a minority interest, valued at about $4 billion, in the company's cable-TV assets. Parsons must revive the AOL online division, which is dragging down the successful entertainment, publishing and cable divisions. He must deal with multiple federal investigations of AOL's accounting practices before and after the merger, and if those probes turn ugly, judge whether it makes sense to keep "AOL" in the company name. Either way, Parsons must somehow restore the company's credibility with investors.

During his interview with TIME, Parsons, a New York City native and former corporate lawyer, seemed at once sober and cheerful. He described 2003 as "a reset year," in which the AOL division will be reorganized and streamlined to better serve its traditional dial-up customers while it seeks to win more broadband subscribers. If all goes well, Parsons says, the online division could return to earnings growth in 2004, at double digits in following years. If results fall short of that goal--as some industry analysts predict they will--insiders say the division will at least be dressed up for sale at a better price than it would fetch today.

Leading the rescue effort at the online division is Don Logan, 58, a veteran publishing executive respected by Wall Street, whom Parsons promoted in July to serve as one of his top deputies. A plainspoken Alabaman and football fan, Logan says his game plan is "about blocking and tackling, as opposed to the big exciting idea." He is currently focused on improving renewal rates among AOL's subscribers--an effort that could save hundreds of millions of dollars.

Case plans to stay on as a director of AOL, but key investors say he will not wield much influence. At a lunch last fall, Case irritated Crawford by refusing to accept some responsibility for the slumping stock price. Case reportedly painted himself as a victim who had left the running of the company to Levin and Pittman. And now, to Dick Parsons. --With reporting by Daniel Eisenberg/New York and Sonja Steptoe/Los Angeles

With reporting by Daniel Eisenberg/New York and Sonja Steptoe/Los Angeles