In December 2005, Time Warner (TW) was the subject of two different news stories. Its AOL division was pursuing an online advertising alliance with Microsoft, while continuing to have discussions with its current partner Google. It was also confronted by dissident shareholder Carl Icahn who challenged management to break up TW.

a. TW's board estimated that a 6-month continuing conflict with Icahn would reduce TW's value by $200 million on average. The cost to Icahn and his backers of mounting a full challenge to the board would be about $50 million. Some financial pundits believed that Icahn's real motive was to induce TW's board to pay him greenmail, buying his stock (about 3% of shares) at a premium to be rid of his challenge. Under these circumstances, do you expect Icahn to go through with his challenge? What if there is a provision in TW's charter stating that any price premium paid for a special purchase must also be extended to any and all shareholders owning more than .1% of TW shares?

b. AOL and Google's partnership at the time generated annual profits of about $250 million and $70 million for the respective parties. Analysts estimated that an AOL-Microsoft alliance would generate an annual total profit of $500 million. Losing AOL as a partner would also undermine Google's competitive position - meaning a reduction in its overall profit of $50 million (on top of the foregone $70 million alliance profit).
In an efficient negotiated agreement, should AOL partner with Microsoft or with Google? Explain.

c. In the AOL-Microsoft negotiations, Microsoft believed that online ad revenue was mainly driven by the overall number of site visitors and users (an area where Microsoft's MSN site is strong), while AOL believed ad revenue would depend on customers undertaking searches (Microsoft's search engine is weak and less popular). How might these different opinions affect how an agreement is structured (and whether there is an agreement at all)?