Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner, by Nina Munk. HarperBusiness, 352 pages, $26.95.

Writing a satisfying book about the AOL–Time Warner merger and its aftermath is like getting a laugh from a joke when everybody knows the punch line-and yet the challenge of making this familiar territory seem worth going over again is taken up with gusto in two new books by talented journalists. Though neither author makes a serious effort to tell the broader story about the state of the media industry, the Internet boom and bust, or even why seemingly sensible mergers go horribly wrong, they provide such compelling detail about the train wreck that was AOL Time Warner that you can't turn away.

The title of Kara Swisher's book, There Must Be a Pony in Here Somewhere , actually is the punch line of an old joke: It's what the enthusiastic youth answers when asked why he's digging in an enormous pile of manure. As Ms. Swisher demonstrates, the sentiment became an unofficial corporate mantra at AOL.

Ms. Swisher's extraordinary knowledge of AOL (she previously published a well-received history of the company, AOL.com ), accounts for her new book's strengths and its weakness. Her story about the T-shirts AOL's business-development team made up is alone worth the price of admission: After the Time Warner team complained during the rushed due diligence that the AOLers were "making it sound as if you're buying us," AOL produced shirts emblazoned with the concise reply, "Putz, we are."

But the AOL-centric nature of both the specific anecdotes and the overall perspective lead Ms. Swisher to miss several key aspects of the transaction's dynamics. She ends her book awkwardly with a discussion of 13 steps she believes would "fix" the AOL service itself-as if this were the most significant issue raised by the failed deal.

In Fools Rush In , Nina Munk provides more balance and even more juicy detail. Both books do a remarkable job of documenting the fact that the people at the top of AOL knew the jig was up: Their stock price had gotten way ahead of the growth the business had left to deliver. Steve Case and his bankers then undertook a systematic review of how to get out while the going was good. Mr. Case settled on Time Warner as the perfect asset.

Fools Rush In really delivers in its vivid portrait of Jerry Levin, the perfect mark for the con of the century. Brilliant, isolated, arrogant and emotionally fragile after the death of his son, Mr. Levin had become increasingly frustrated with his inability to bring Time Warner into the digital age. Mr. Case drew Mr. Levin in first by feigning a lack of interest in running the combined company himself and then by convincing him (over lots of wine) that "[b]y using the new technology to give people access to news and information, and to one another, Time Warner could reduce ignorance, intolerance, and injustice." So confident was Mr. Case of Mr. Levin's commitment to this messianic vision that he felt free to pull the ultimate bait-and-switch minutes before the hastily convened Time Warner board meeting to approve the deal. Not only was he not willing to be a non-executive chairman, Mr. Case told Mr. Levin, but he also wanted a number of the company's top executives to report directly to him. Mr. Levin relented. During the intervening year before the transaction closed, Mr. Levin pointedly refused to engage with his Time Warner colleagues, who had taken note of the obvious warning signs-the weakness of AOL's business, the aggressiveness of its accounting-andwere seeking ways to get out of the deal.

The guilty pleasure of watching so many powerful, intelligent people make fools of themselves during the era of Internet euphoria more than compensates for any weakness in either book. Still, it would have been nice if the authors had tried to address directly the basic question of whether this transaction ever made any sense at any price. To be sure, both authors point out that the promised $1 billion in cost synergies was a fantasy figure. But Ms. Swisher, for one, seems to suggest that the merger might have worked if it hadn't been for certain Time Warner executives-lacking the necessary Internet "DNA or … passion"-who were trying to sabotage the deal. If she really believes this, Ms. Swisher has missed one of the most important lessons of the AOL–Time Warner transaction.

Treating the AOL–Time Warner deal as an anachronism of the boom minimizes the strong similarities between it and bad media deals struck before and since. Ms. Munk correctly highlights the close parallels between this transaction and the earlier merger of Time and Warner. One of the most important similarities is that both destroyed shareholder value: She reminds us that it took Time Warner shares the better part of a decade to achieve the level of the rejected 1989 cash offer of $200 per share made by Gulf and Western (now called Paramount). But there's a parallel that Ms. Munk neglects to mention: The strategic justifications for both deals were largely spurious.

In addition to the supposed cost synergies, the AOL–Time Warner combination was meant to accelerate AOL's transition to broadband, to secure significant new cross-media advertising deals and to magically monetize "an awesome 130 million 'subscription relationships' in total." None of this was credible. Time Warner already had a thriving broadband service called Road Runner. If this service had been "blow[n] up," as Mr. Case wanted, that would have represented a dis- synergy of the deal. SBC Communications very successfully uses Yahoo to market its broadband service-but it doesn't need to merge with Yahoo to do so. Ms. Munk and Ms. Swisher both effectively highlight how the much-vaunted cross-media deals were few or fraudulent. And given that Time Warner never found much incremental benefit from having both magazine subscribers and cable subscribers, it was always unclear how adding I.S.P. subscribers to its revenue stream would jump-start the business.

Strangely, although the AOL–Time Warner deal has been repudiated, these kinds of "strategic" justifications for media deals in general have not. The recent investor presentation outlining the rationale for the NBC-Universal combination-entitled "Imagine the Possibilities"-was eerily familiar in this regard. Complete with up to $500 million in promised synergies (at least $100 million of which would be "revenue-related") and the promise that "Content Origination Drives Platforms," one slide showed a mosaic of the various brands of the combined entity and summed up the strategic rationale in a single word: "Wow!"

One media mogul was recently asked at the "off-the-record" Foursquare Conference why media companies have such a seemingly insatiable desire to make acquisitions. "Bigness sucks less than being small," he replied.

Media moguls are not alone in making foolish acquisitions or overpaying for sensible ones-but the fact that the media industry has consistently underperformed the market as a whole suggests an unhealthy propensity in this regard. It's not altogether surprising that businesses predicated on the notion that there's no such thing as bad publicity rarely see an acquisition that doesn't seem like a good idea. If AOL Time Warner doesn't teach media moguls to be more selective in defining the scope of potential "strategic acquisitions," media investors will continue to hear that giant sucking sound: It comes from their shrinking portfolios.

Jonathan A. Knee is a senior managing director at Evercore Partners and an adjunct professor of finance and economics at Columbia Business School.

mounted a podium at the Millennium Broadway Hotel in Times Square and started

in on a speech to a hall packed full of investors. The host was J.P. Morgan,

and Mr. Levin-fresh off the company jet from business in China, and then the Harry Potter premiere in London-was

earthtone-attired in post-merger AOL Time Warner wear: a tweed jacket, thick

denim shirt and slipper-like suede shoes.

Mr. Levin-a suit-and-tie man if ever there was one-may well have

embraced the casual AOL Friday culture, but the message he had for the investor

community that day was not the message that had been previously coming from the

world's largest Internet company.

He spoke softly into the microphone. AOL Time Warner, he said,

"operates as a public trust as well as for our shareholders. I will provide

whatever resources necessary to CNN, NY1, to all the magazines; I will do

whatever it takes. And I'm not interested in hearing what happens to margins

with respect to these expenses. Things," he said, "have really changed."

He then paused and said:

"And it is a profound change."

The rest of Mr. Levin's presentation was skewed heavily towards

Time Warner's upcoming film slate: Harry

Potter and the Sorcerer's Stone was positioned to be a smash, Ocean's 11 had massive star power, and

Jim Carrey was going sentimental in The

Majestic . In terms of growth in its other businesses, like advertising,

subscriptions and AOL itself, there was little guidance given. Mr. Levin

focused on content, on responsibility and on service. The message was clear.

For any investors who were confused, Mr. Levin's message was: It's a new world, and AOL Time Warner has a

new mission-get used to it.

"I'll keep using this phrase 'public trust,'" Mr. Levin said

after his speech. "It was like that at Time. I'm the C.E.O., and this is what

I'm going to do. I don't care what anyone else says."

Gerald Levin, who about two years ago agreed to have his company

taken over, has done what Gerald Levin seems to do: He took over the takeover.

A philosopher-prince of the American media establishment, he was certain of his

function in the new universe, a fact that was confirmed by the vast events of

this autumn. Before Sept. 11, AOL Time Warner was a media monster trying to come to terms with its post-merger persona.

Following the events of Sept. 11, AOL Time Warner was no longer an Internet

company. It is now what it originally was in 1923, when another man on a mission-Henry

Luce-slapped together the first issue of Time

and began selling punchy, character-driven stories to an American public

starved for concise information, jaunty attitude and the embodiment of a

revolutionized age. When Time Inc. merged with Warner Bros. in 1989, the great

mythologizers of the media merged with the mythmakers. With the addition of CNN

and eventually the AOL deal, the power of the company became its ability to

report, create, tell, analyze and deliver the American story globally as no other

entity can. And as the Internet dissolved into the rest of the media-and was

financially and culturally brought down to size as just another delivery

system-the great storytelling company became more Time Warner AOL than the

other way around.

And after Sept. 11, Gerald Levin had an immediate perception: His

company had the capability to report, create and deliver the American story at

a moment when it was needed more than it had ever been.

His ability to comprehend and oversee those parts of the company,

from news to entertainment, made his the

cultural influence on AOL Time Warner-not chairman Steve Case's, not co–chief

operating officer Bob Pittman's, but Gerald Levin's. Coming up on the two-year

anniversary of what was once perceived as the AOL hijacking of Time Warner, the

62-year-old Mr. Levin is driving the monster. At the time of the merger, those

who knew Mr. Levin warned the uninformed not to underestimate him. And they

were right. He had a focused perception of his company's strengths, and now

he's using them.

As in the conciseness of this statement at the J.P. Morgan

conference: "I like movies," he said. "And now, what is most important to

people, besides news and information, is storytelling." It was as though Luce

had become a Warner brother.

Mr. Levin, as well as all

other AOL Time Warner executives, declined to comment for this story,

but the Jerry Levin revival shouldn't come

as a surprise. He is the great boardroom survivor of his era. In the early

70's, he was a young cable executive running HBO for Chuck Dolan. He ended up

at Time Inc. when it took over the company, while Mr. Dolan, his boss and HBO's

founder, landed in the Long Island suburbs with a few thousand cable

subscribers. Somehow, the diminutive, sometimes bemused-looking Mr. Levin

outlasted them all.

Now Mr. Levin is lopping off more corporate heads, as he's been

doing for more than a decade now. He ran roughshod over Warner Bros.'

management in the early 1990's; in 1992, he fired nine directors on his Time

Warner board; and in the past year, he's nosed down the khaki-clad AOL Internet

interlopers from Dulles, Va. Some executives see a little bit better in a dark

time, and Mr. Levin is one of them.

He has endured difficult times in the past, which may have

steeled him to keep his head: He lost his 31-year-old son Jonathan to a

murderer four years ago. On another plane, he lost $100 million in a 1994

investment in interactive television in Orlando, Fla. And as a man who has

fired hundreds of employees over the years, he understands the value in

dispensing the ugly truths. His attitude is in sharp contrast to the giddy,

boomtown-growth promises that AOL executives became schooled in making to

investors. Mr. Pittman and his chief financial officer, Mike Kelly, both from

AOL, talked a silky-smooth game to Wall Street-$40 billion in revenues, 30

percent growth in cash flow, etc., etc.-but they were the last pixilated

Panglosses of the Internet era, and their exuberance was junked after Sept. 11.

Earlier this month, Mr. Kelly was removed from his corporate post

in New York and rotated back to AOL headquarters in Dulles, a few days after a Wall Street Journal article had him

yelling profanities at two high-profile Merrill Lynch analysts who had

downgraded AOL Time Warner stock. His replacement, Wayne Pace, is a Time Warner

man.

And this August, Glenn Britt, an almost 30-year Time Warner man

and longtime associate of Mr. Levin, was named the chief executive of Time

Warner's cable unit. Before that, WB Network founder Jamie Kellner was given

Turner Broadcasting Systems. "I have a habit, and this will continue, of making

constant changes with people," Mr. Levin said on Nov. 9. "Like some managers

like to change margins; I like to change

people." Cross-fertilization, Mr. Levin calls it, and now with a

distinctive Time Warner aroma.

"If you look at all the big job changes, they have all gone to

Time Warner people," said one senior investment banker. "Jamie Kellner, Glenn

Britt … they didn't bring in AOL people for any of those positions. And then

there's Mike Kelly. You can argue that has been a failed attempt at

cross-fertilization." More and more, it seems, the competition with AOL seems

to be shifting in favor of Time Warner executives. And it happened just as Wall

Street awoke to the fact that the pie-in-the-sky promises made by AOL were not

going to happen.

That's not news: In a brutal media recession, many companies

downgrade their growth forecasts. But Mr. Levin took another approach. When a

company refers to itself as a "public trust" and suggests that the exigencies

of its corporate mission may well supersede its commitments to shareholders, it

steps onto another plane. Somehow, Mr. Levin summoned enough nobility and

gritty pomp to exalt his company's purpose. It's a message that could only have

come from a tough executive steeped in his company's tradition. He looked at

AOL Time Warner and chose to promote service, integrity, uplift-all at odds

with the narcissistic message of the "You've Got Mail!" revolution.

Not that Mr. Levin's statement of a public trust is

self-sacrificing.

"Now that the Internet stuff has proven to be fiction, Jerry and

the Time Warner people are going back to the businesses that make money," said

one senior investment banker familiar with the inside workings of the company.

" Harry Potter will make money, music

will make money, cable will make a shitload of money, as will Turner and WB.

This was a great company. For the AOL guys to come in and say 'We are the

future of media and you guys are old news' irritated a lot of people. Now

people are saying, 'You know what? There is no such thing as Internet

advertising.'"

Nevertheless, AOL's cash flow-expected to be $3 billion this

year-is nothing to sniff at.

Two years ago, it all seemed so different. In late 1999, when Mr.

Levin and AOL C.E.O. Steve Case started batting around ideas, Mr. Levin was

under pressure from the Street to develop an Internet strategy. Time Warner had

stopped growing, and more than needing a growth injection, Mr. Levin needed a

crew that could sell Wall Street on the idea of infinite growth. Mr. Case,

along with his president, Mr. Pittman, and his C.F.O., Mr. Kelly, had done this

brilliantly, producing one whiz-bang growth quarter after another. Investors

bought the message, shooting the AOL stock from $2 in 1997 to $91 and change by

January 2000. That was seductive to Mr. Levin, then Time Warner's C.E.O., whose

relationship with Wall Street had always been fraught with assorted tensions.

Despite cable growth, Time Warner was burdened with billions in debt and could

never produce the AOL-style triple-digit growth rates that left traders and

fund managers wet with joy. So Mr. Levin cast his lot with a bunch of

fortysomething Internet wizards-much as he'd done in 1989, when he gambled on

his ability to survive with smooth-talking Warner boss Steve Ross.

Throughout much of 2000 and 2001, Mr. Pittman, named co–chief

operating officer with Time Warner's Richard Parsons, was AOL Time Warner's

primary voice when it came to wooing the Street. Responsible for the company's

growth engine, subscription businesses such as magazines, cable and AOL (Mr.

Parson's brief covered content, such as films and music), Mr. Pittman sold the

product. Forty billion in revenues for

2001, I promise, he assured all who questioned how this great beast of a

company could grow its cash flow at 30 percent in the midst of the biggest

media recession in over 10 years.

His C.F.O., brash, forceful Mr. Kelly, echoed the same mantra.

But even before Sept. 11, it had become clear that AOL, with its maturing 32

million–strong subscriber base, just couldn't grow as fast as it once did.

Growth was leveling off and advertising was down. Like General Electric,

Wal-Mart and other great American companies, AOL was not immune to a recession,

contrary to Mr. Pittman's assertions. When the company announced its

third-quarter results on Oct. 17, it became more evident that the growth trend

was downward. There would be no $40 billion in revenues and no 30 percent

growth in cash flow. At $37, the stock is well off its 52-week high of $58.

"This is a company that historically has had a grand notion of

its growth rate," said Doug Kass, a hedge-fund investor who's been an active

and vocal short seller of the stock. "Levin recognizes now that there is still

a pre-bubble mindset amongst AOL executives, and what he is trying to do is

graciously bring expectations in line with a post-bubble world." Not that Mr.

Pittman's position within the company is in jeopardy-his infighting skills

remain strong. For example, while Mr. Britt, the new cable C.E.O., may be a

Levin guy, Thomas Baxter, formerly of the cable company Comcast, and John

Billock, from HBO, are Bob Pittman men. With Mr. Case having removed himself

from any day-to-day operating responsibility, Mr. Pittman remains the most

senior and powerful of the AOL executives-responsible for over 70 percent of

the firm's cash flow.

Beneath him are a series of hard-charging fortysomething deal

makers: David Colburn, head of business development, an entertainment lawyer

responsible for AOL's banner-ad deals; Ken Lerer, in charge of communications,

formerly a New York magazine writer

and AOL's primary P.R. consultant; Barry Shuler, C.E.O. of AOL and the online

maven.

These four men, together with Mr. Case, made AOL what it is

today, and in the woozy days of the merger in January 2000, they not only

landed the peachiest of positions, they came to symbolize the young,

aggressive, deal-driven ethos that had allowed AOL shareholders to assume a 55

percent majority stake in the company. Throughout much of this year, however,

all have been big sellers of AOL Time Warner stock. Mr. Colburn has sold

roughly $8 million; Mr. Lerer, about $20 million; Mr. Pittman, some $55

million. Mr. Kelly has sold almost $15 million and Mr. Case, almost $120

million. And the selling could well pick up in January, when the last batch of

pre-merger AOL options vest.

Mr. Levin, on the other hand, has sold not a share during the

same period. Indeed,  outside of charity

and tax purposes, Mr. Levin has sold hardly any stock at all during his time as

C.E.O.-a fact that, with his tortoise-like, take-the-long-view perspective,

distinguishes him from his AOL co-workers, as well as from the Street as a

whole. Let the kids sell out; now is the time for gravitas and grown-ups, men

whose riches span decades, who can give ease and comfort to a board of

directors.

Which is why many AOL Time

Warner–ologists say the grip that Mr. Levin, along with the 53-year-old

Mr. Parsons, has on the company's reins is getting tighter by the day. "Pittman

is a great guy and a great manager, but when it comes down to it, his job is ad

sales," says one banker. "The guys who are really running the business now are

Parsons and Jerry."