Execs Bullish On Cash Flow

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The combination of Time Warner Inc. and America Online Inc. creates an Internet, television, publishing and music powerhouse with annual revenues of $40 billion and yearly cash flow of about $10 billion-figures the new company said it will still make easily, despite a downturn in the advertising market.

"We're committed to reach $11 billion" in cash flow, AOL Time Warner Inc. co-chief operating officer Robert Pittman told CNBC Friday morning, insisting the company still expects to generate the same amount of annual cash flow that executives said the pair could generate last year.

But one analyst said hitting those cash-flow targets could require massive cost cuts, mainly through layoffs. That is already beginning to happen at Time Warner's CNN unit, which is expected to announce the elimination of 400 to 500 jobs this week.

"Certainly CNN is a shining example of synergy not happening," said David Simons, managing director of Digital Video Investments in New York. "My guess is long before you see synergy, you'll see monstrous cost-cutting."

AOL Time Warner executives said their combined companies are better prepared to navigate a downturn in advertising spending.

"Driven by the AOL machine, you're really tapping into the direct-marketing revenue stream," AOL Time Warner CEO Gerald Levin told CNBC. "As we go into this year, you'll see a little dancing going on, but by the second half I think that it [ad spending] will pick up."

Pittman also suggested that smaller media players are more affected by a drop in ad spending.

"When you find that slowing down, it doesn't slow down for everybody. They [advertisers] don't cut back across the board, they cut back on tertiary buys-the secondary buys. They don't cut back from the major players," Pittman said.

Aside from the ad slowdown, there has been speculation that AOL Time Warner will look to divest its cable operations, either through an outright sale or a spin-off of the cable division.

Sanford Bernstein & Co. cable analyst Tom Wolzien said while that remains a possibility, he doesn't expect it to happen anytime soon.

"It's an interesting trade-off," Wolzien said. "At some point, owning cable becomes less strategic and more financial."

Wolzien added that he doesn't see AOL Time Warner making that decision at least for another three to five years.

"I think there will be a fundamental shift in the rationale for the holding," Wolzien said. "The one thing that can change that and keep it strategic is the advent of interactive television with the Turner networks, and how you can tie cable together with AOL TV.

"It may remain in a strategic position but for different reasons than what those reasons had been in the past."

ITV was at the front of Levin's mind on Friday in an interview with CNN, an AOL Time Warner property.

"The notion of interactive television has been a long-time dream for many of us," Levin told CNN Friday morning. "With the new company, we can finally deliver on that promise."

There has also been speculation that a large number of Time Warner executives would leave the company after the merger was completed, especially since their stock options would vest immediately after the closing.

Wolzien wasn't convinced a large number of managers would head for the doors.

"Anytime there's a management change and people can cash out their options, it's a chance for some folks to leave," Wolzien said. "I think a lot of people basically like to work, even if they're rich."

Operators for the most part saw the deal and its FCC approval as good news for the industry.

"One of the things we would have hoped would not have happened is the forced-access requirement," said Cox Communications Inc. spokeswoman Kimberly Brown. "Hopefully we won't see it as a precedent going forward."

Steve Donohue contributed to this story.

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