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AOL hints at more layoffs

The media giant is likely to be ruthless in living up to its cash-flow objectives as the sluggish economy takes its toll, analysts say.

With AOL Time Warner suggesting in its most recent regulatory filings that more restructuring is in the works, analysts agreed Thursday that layoffs are likely.

"Management is pursuing various initiatives to enhance efficiencies," the company said in the typically oblique wording of regulatory filings.

In Wednesday's quarterly financial-status, or 10-Q, filing with the Securities and Exchange Commission, the media and entertainment giant elaborated somewhat by saying that certain charges it has already accounted for relate to "restructuring plans that have been committed to by management." But all of those plans are yet to be carried out and "are expected to be refined in the fourth quarter as management continues to evaluate the integration of the combined companies and completes its purchase price allocation," AOL Time Warner said.

The company, now in its fourth quarter, has announced several small batches of job cuts since it reported its third-quarter results in October. Its America Online division has made small reductions to its marketing staff, and people were laid off at magazines AOL Time Warner acquired through British magazine publisher IPC Media. Many of those magazines have since folded.

"I don't see any massive restructurings," said Paul Kim, an analyst at Kaufman Brothers. "It will just be on the scale of Yahoo."

At the time of its third-quarter report last month, Yahoo announced plans to reduce its staff. At the company's analysts day Thursday, Chief Executive Terry Semel said the company would lay off 400 employees.

"There's nothing structurally wrong with these companies," Kim said. Rather, he and other analysts say, it's the sluggish economy taking a toll.

Jefferies analyst Frederick Moran agreed that job cuts were likely. "Because of the lingering economic slowdown, management has kept open the possibility of layoffs," Moran said. "Management has a firm objective of maintaining double-digit cash flow growth" and is likely to be ruthless in living up to it.

AOL Time Warner has already taken charges totaling $1.13 billion related to its restructuring, $690 million of which is "related to work force reductions and represented employee termination benefits," according to its filings.

AOL spokeswoman Tricia Primrose said the company wouldn't elaborate beyond the filing but said, "We are always looking at ways to run our business more efficiently."

Of buybacks and box-office expectations
Other important issues brought up in AOL Time Warner's filing included the company's arrangement with Bertelsmann. According to the 10-Q, the German media company has said AOL Time Warner may have to buy back its stake in the companies' AOL Europe venture between Dec. 15 and Jan. 15.

But that's something analysts and investors have seen coming for a long time.

"It's free money on the table" for Bertelsmann, said Kim, who has no doubt that the German company will exercise its right to make AOL Time Warner buy back its half of the venture.

Bertelsmann will sell the 49.5 percent stake back to AOL Time Warner for about $6.75 billion to $8.25 billion, according to an agreement made last March.

That's "about $5 billion more than it's worth," said Moran, putting the cost to AOL Time Warner at roughly $1 a share. But that's already been factored in by investors, he added.

"It's understood in the stock price," Moran said. But that may not stop shares from undergoing a decline in the near future, he added.

AOL Time Warner also said that a sharp increase in intercompany ad spending helped offset some of the effects of the weak advertising market. For the first nine months of 2001, intercompany advertising rose $240 million on a pro forma basis compared with the same period a year ago, from $12 million to $252 million. The figure represents the fair market value of ad space used to promote AOL Time Warner's own products and services.

Merrill Lynch analyst Henry Blodget expressed concern that the company didn't break out how much intercompany advertising was in each division. That makes it "difficult to ascertain the true underlying growth of each division," the analyst said in a research note.

Blodget also speculated that an initial public offering of the company's Time Warner Entertainment partnership could be under way, as the filings indicated that AOL Time Warner and AT&T have resumed a registration process that could bring the unit to market.

AOL Time Warner has been heavily promoting its own services and products through its online, print, broadcasting and cable units. Such products include the media giant's movie "Harry Potter and the Sorcerer's Stone."

The film is expected to be a huge hit at the box office when it lands in U.S. theaters Friday. Traditionally, when stocks run up in expectation of a box-office hit, they decline shortly after the movie is released.

"We're more inclined to buy in the low $30s, which looks likely," Moran said.

The company has been trading around $37 a share in the past month, up significantly from a three-month low of $29.25 a share in late September.