AOL Fallout: Bertelsmann Pulls Back

Bertelsmann Chairman and CEO Thomas Middelhoff said Tuesday that he would resign from the board of America Online, on the grounds that he cannot remain on the board of a competitor. Bertelsmann, the German media giant that is one of Time Warner's fiercest competitors, owns 50 percent of AOL Europe.

Middelhoff made the announcement on CNBC, but didn't specify when the resignation would be formalized.

Bertelsmann has spent the last two years aggressively recasting itself as a global media player, both in offline publications and online content. Chairman and CEO Thomas Middelhoff has made no secret of his intention to take on the likes of News Corp., Disney and even Time Warner itself. His first open challenge to the New York media giants came in 1998, when his company bought Random House.

This week's news called for delicate politicking by all the players. AOL has endorsed the multitudes of content properties held by Time Warner. But AOL Europe is largely controlled by Bertelsmann, so it won't take any stance that is too supportive of the new acquisition. Bertelsmann doesn't want any damage done to its largest and most impressive Internet investment, and needs to treat the newly joined AOL Time Warner more as a valuable partner than as an association of a onetime friend with a longtime enemy.

All parties have said that AOL's overseas partnerships and investments won't be affected, but a Bertelsmann spokesman agreed Tuesday that some changes in the structure of the AOL Europe organization might arise during the next 12 months.

Bertelsmann and AOL have a long history of cooperation. At one point, the German company held nearly 5 percent of AOL's stock. Middelhoff released a statement Monday saying the deal was proof of his own vision for the industry.

"The move by AOL and Time Warner shows that we've been pursuing the right goal for years, i.e., to integrate the Internet into all media genres and businesses," Middelhoff said. He also said that Bertelsmann would now focus "even more sharply on generating content in this new competitive environment."

The company spent 1999 adding Web properties to its portfolio. Bertelsmann said in September 1999 that it was considering a public float of the various properties, and it began to segment those companies, which include many diverse and competing names, into sellable prospects.

But AOL Europe has been the star in the Bertelsmann fold. Headed up by Andreas Schmidt, a former member of Bertelsmann's management, the company is the leading Internet service provider in Europe. Schmidt has kept public comment on the Time Warner merger to a minimum, saying the story is an American one.

"Today's merger announcement between America Online and Time Warner is a natural union between two great leading global media companies with very strong multiple brands and joint venture partners like Bertelsmann," he said Monday.

"This merger is truly a win-win for AOL Europe - it translates to even more significant content, resources and a clear commitment to grow our market leadership throughout Europe."

There has been a slight distancing between AOL and Bertelsmann in the last six months, seemingly without acrimonious side effects. In August, Bertelsmann sold off a majority portion of its holding in AOL, reducing its share of the overall company from 5 percent to less than 1 percent. The company reportedly raised some $691 million in the deal, which will go toward further investments in online properties. Bertelsmann has never exclusively endorsed AOL Europe among its European Internet investments, preferring to take diverse stakes in a number of ventures. The company owns 26 percent of Lycos Europe and 75 percent of magazine publisher Gruner + Jahr, which owns 100 percent of a competing German search engine, Fireball. Still, before today's announcement, Middelhoff had remained active on AOL's board.

Oliver Herrgesell, a spokesman for Bertelsmann, said that the merger wouldn't force Bertelsmann to look for a buyer of its own. The company isn't publicly traded, and is therefore under no threat of a hostile or shareholder-forced takeover.

"This is a specific point where Bertelsmann is very unique," he said. "It can't be bought. Bertelsmann will be Bertelsmann and won't get bought by a Yahoo."

AOL and Lycos' European competitor, Excite, says that a shakeup at Bertelsmann would have little effect on the Internet portal fight here.

"Bertelsmann already basically runs and controls things in Europe," says Evan Rudowksi, managing director of Excite Europe. "Time Warner is not very European-focused, and I don't think Time Warner adds much to the European picture. Bertelsmann has always had the challenge of juggling its Lycos and AOL relationships, and we'd like to see that continue as long as possible."

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