Why Icahn Backed Down

By Daniel Kadlec

Patience is not always the best tactic for corporate chieftains to use when they are fighting those who wish to oust them, but it seems to have worked for Time Warner chairman Richard Parsons in his battle against Carl Icahn. In August, Icahn and a group of investors launched a bid to split up the Time Warner media empire (which includes Time Inc., publisher of this magazine). But Icahn could not win the support of key shareholders, who balked at his plan to oust Parsons and install a new slate of directors as a precursor to a company breakup. Parsons and Icahn talked about striking a deal, but the talks stumbled after Parsons declined to appoint two of Icahn's handpicked directors. Icahn scaled back that demand, and the two finally reached a truce last week." I don't think shareholders were ready to give me the keys," Icahn told the New York Times. (Icahn declined to talk with TIME.)

Icahn and Parsons agreed to a settlement in which Icahn dropped his assault and Parsons made certain concessions. Time Warner pledged to buy back $20 billion in stock, up from $12.5 billion. It promised to cut costs by an additional $500 million in 2007 and agreed to add two independent directors to the board--after consulting with Icahn about the candidates. Icahn's investor group still controls 3.3% of the stock, and he isn't likely to go away soon, so Parsons made other concessions, including a promise to review the findings of a report issued by Icahn's investment adviser, Lazard. One new point of agreement: Icahn now shares Parsons' view that Time Warner's cable division should not be spun off 100% because of the potential tax bill.

If nothing else, both sides managed to save face after months of accusations and mounting acrimony. Just 10 days before the truce, Icahn, at a glitzy press conference in New York City, had defiantly called Parsons out, accusing him, among other things, of selling Warner Music at a fire-sale price and being too slow to find a growth plan for the AOL unit. Time Warner execs insisted that their strategies with Warner Music and AOL were appropriate under the circumstances.

Parsons, for his part, said he was "very pleased to have reached an understanding with Mr. Icahn." That he should be, since billionaire corporate raiders like Icahn don't often give in this quickly.