Time Warner to spin off AOL

Update at 6:54 a.m. PDT: Added Time Warner's stock movement for Thursday morning, along with background on the history of AOL and Time Warner.

Media giant Time Warner announced Thursday morning that it will cast off its AOL division to become a standalone company.

Before that separation can take place, Time Warner will buy the 5 percent of AOL owned by Google so that it will have 100 percent control of AOL. Time Warner expects the transaction with Google to take place in the third quarter and the final AOL spinoff around the end of the year.

As an independent, publicly traded company, AOL will focus on growing its Web brands and services, as well as its advertising business, according to Time Warner.

Time Warner CEO Jeff Bewkes said in a statement:

We believe that a separation will be the best outcome for both Time Warner and AOL. The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content businesses. The separation will also provide both companies with greater operational and strategic flexibility. We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company.

The separation of AOL from Time Warner will put a final nail in the coffin of one of the emblematic mergers of the dot-com boom and bust. Brimming with the abundant funds and hyper-optimism of the Web's go-go years, AOL--then known as America Online--acquired Time Warner in January 2001 to create the world's largest media company. Within a year, however, it was already apparent that the union of new and old media was not as "supercharged" as its backers had promised.

By September 2003, things had gone so poorly with the merger, and specifically with AOL's dwindling dominance as an online portal, that AOL Time Warner dropped "AOL" from its name, and became just Time Warner.

In subsequent years, AOL has continued to struggle. Consumers have dropped their dial-up subscriptions in droves as broadband access became more widely available and they became more comfortable navigating the Internet on their own.

The first quarter of 2009, like other quarters before it, showed just how much of a burden AOL had become on Time Warner. For that three-month period, AOL's revenue dropped 23 percent from the year-earlier quarter, and Time Warner CEO Jeff Bewkes emphasized at the time that the company was seeking "the right ownership structure for AOL."

In March, several weeks ahead of that earnings announcement, Time Warner appointed a new chief executive for AOL, Tim Armstrong, calling him "the right executive to move AOL into the next phase of its evolution." Armstrong had previously been a leader of Google's advertising sales operations.

Time Warner shares began trading up slightly Thursday morning following the AOL news, starting the day at $23.34 after closing Wednesday at $23.