Time Warner execs can cash out on AOL merger

Time Warner may be facing an early exodus of top executives who instantly became eligible to cash in all their stock options under an unusual company provision that took effect upon last month's takeover announcement by America Online.

The long-standing provision, which applies to a takeover by any company, was triggered Jan. 10, when Time Warner signed off on America Online's historic $160 billion merger bid, according to Time Warner spokesman Ed Adler. That means Time Warner employees with previously unvested options won't have to wait for the merger to officially close before exercising them. They can do so now.

"There are many folks here measuring their lives now. Should they continue working at this pace or retire?" said a Time Warner executive who requested anonymity. "I know there is a lot of chat about farms and islands."

Whether a mass exodus is in the works remains to be seen. Several Time Warner employees said enthusiasm for the merger remains high, and many said they are curious to see what changes may lie ahead when AOL takes over.

Nevertheless, Time Warner's accelerated vesting policy has baffled some compensation experts, who say it practically opens the door for executives to cash in and ride off into the sunset with their earnings.

"Something like that is not the best design, because what if the deal doesn't close?" said Dave Bisson, senior consultant at WestWard Pay Strategies, a San Francisco-based executive compensation firm. "It doesn't make sense from a shareholder perspective."

The provision has been a part of Time Warner's stock options policy since before the company merged with Turner Broadcasting in 1994, Adler said, although he could not be more specific.

"It was put in to preserve stability and to protect employees for a time of change," he said in an interview.

In addition, all company contributions to Time Warner's 401(k) retirement plan vested as a result of the announcement, according to a memo sent to plan enrollees and obtained by CNET News.com.

Although AOL employees also will benefit from an accelerated vesting schedule, the terms are not nearly as generous as Time Warner's; at AOL, full vesting comes a year after the merger closes. Assuming the deal goes through, which is not a foregone conclusion, that process that could take anywhere from nine to 12 months.

Assessing their options Top-paid Time Warner executives as of Dec. 31, 1998.*
Name	Title	Unvested options	Current market value
Gerald Levin	Chairman and CEO	2,099,994	$178,499,490
Ted Turner	Vice chairman	1,866,664	$158,666,440
Richard Parsons	President	700,000	$59,500,000
Richard Bressler	CFO	233,332	$19,8333,220
Richard Haje	General counsel	180,000	$15,300,000
* Most recent available data. Source: SEC DEF-14A proxy filing

As a result, Time Warner options holders could have access to their shares as early as two years ahead of their peers on the other side of the deal. And they can exercise their options regardless of whether the merger goes through. Typically, options granted to employees working for an acquired company vest when the deal closes after approval by shareholders and government regulators.

An SEC spokesman said he could not comment on the provision pending research on the agency's position on accelerated vesting schedules.

Beyond Time Warner itself, what may be more detrimental is how such a policy affects the acquiring company--in this case, AOL.

AOL needs to keep as many Time Warner executives as it can, experts say. For an Internet veteran that has shied away from managing content on its own, keeping the talent in Time Warner's myriad publishing, editorial and creative content divisions will be essential in making the combined company work, they said.

"I would think it would be absolute suicide to vest everybody at the moment," said Graef Crystal, an executive compensation consultant based in Santa Rosa, Calif.

So far, no major executive or manager has decided to cash out and vacate his or her post, despite the recent rise in Time Warner's stock. Shares shot through the roof on the day of the merger announcement, nearing $100 a share.

Time Warner's Adler said employees have little motive to take the money and run.

"For a journalist, executive, or for a creative person who's in the middle of their career, AOL Time Warner will be a fantastic place to work and a great opportunity no matter what their net worth is," he said. "Obviously, a long-term career opportunity with a great company clearly outweighs any short-term financial gain."

Crystal said the situation could become a feeding frenzy for rivals looking for media talent. Employees untethered by financial considerations could just as easily be lured by Time Warner's main competitors, such as Disney, Viacom, Universal, Bertelsmann or Sony, he said.

"If you look at Warner Bros. and look at Fortune and all that, mainly it's a lot of brains and talent," Crystal said. "They would be making it incredibly easy for the company's major competitors to raid that talent."

In addition, the jury is still out among many employees, especially in editorial divisions, over how well AOL will manage content. AOL will walk a fine line during the initial months of the completed merger, some say. And without a financial tether, many have no reason to stay if editorial integrity becomes compromised.

"The people who ran Time Warner were people with history for fighting for journalism in general, and people in AOL do not have that history," a Time Warner employee said under condition of anonymity. "Will Jerry Levin and Ted Turner run things, or does Bob Pittman become the real boss?

"Given there already is a concern here about conflict of interest, if one bad thing happens, then you could expect to see the fear factor rise very quickly."