Time Warner, the world's third largest media and entertainment company today said that it would spin off AOL as an independent, publicly traded company by the end of the year, ending eight years of an unequal marriage, when the smaller AOL acquired Time Warner for $147 billion in 2001. (See: World's largest media company is born)

Time Warner, which has been planning to spin off AOL since the past two years, said, ''After the proposed separation is complete, AOL will compete as a standalone company, focused on growing its Web brands and services.''

New-York-based AOL will also continue to operate one of the largest internet access subscription services in the US.

Time Warner chairman and CEO Jeff Bewkes said, ''We believe that a separation will be the best outcome for both Time Warner and AOL. The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content businesses.''

''The separation will also provide both companies with greater operational and strategic flexibility. We believe AOL will then have a better opportunity to achieve its full potential as a leading independent internet company,'' he added.

Since Time Warner owns 95 per cent of AOL, and Google holds the remaining 5 per cent, Time Warner will acquire Google's 5 per cent stake in AOL in the third quarter of 2009, making Time Warner shareholders the owners of all of the outstanding interests in AOL.

The media company proposes to structure the transaction as tax-free to Time Warner stockholders and aims to complete the transaction around the end of the year.

In 2001, when AOL, then a rapidly growing internet services provider known as America Online, acquired Time Warner during the height of the dot-com era venture valuations for $147 billion, it was hailed as the model for the future of media, but the alliance soon began to crumble along with burst of the dot-com bubble in 2002 and AOL's valuation plunged forcing AOL Time Warner to report a loss of $99 billion.

The $99-billion loss was at the time the largest ever reported by a company in the US, and is only marginally behind AIG's loss of $99.29 billion in 2008. The whopping loss made Time Warner drop the AOL from its corporate name.

Since its merger with Time Warner, AOL's $240-billion value has dropped significantly. Once synonymous as the gateway to the web for its 26.7 million subscribers in 2002, AOL was left with only 6.3 million at the end of the last quarter.

With no quarterly growth in its subscriber base since 2002 due to the introduction of the broadband, AOL has been trying to lower its reliance on customers using dial-up connections by building ad-supported online features, but even this has been spurned by surfers who prefer the speedier broadband speeds over AOL's slower dial up services.

In the fourth quarter, display advertising on the AOL network fell 25 per cent compared to the fourth quarter in 2007. Several advertiser verticals lowered ad spending, including personal finance, technology, telecom, autos, and retail. AOL also experienced a reduction in yield and inventory monetisation due to lower ad prices.

Last week, US federal stock market regulator Securities and Exchange Commission said eight former executives of AOL Time Warner had fraudulently inflated the company's online advertising revenues by more than $1 billion between 2000 and 2002. (See: Eight ex-AOL officials sued for inflating results by US regulator)

Four of the executives had agreed to settle the civil charges by paying a total of roughly $8 million in fines and returning allegedly ill-gotten gains.

The lawsuits were the result of a long-drawn investigation by the SEC that began in 2002 after a Washington Post report on a series of unconventional deals involving the online giant.
In 2005, AOL's parent company, Time Warner, reached its own settlement with the SEC, agreeing to pay $300 million.

Google, which had acquired a 5-per cent stake in AOL for $1 billion in 2005, valuing the company at $20 billion, wrote down the value of the investment by $726 million in February 2009, which assumes AOL's new valuation at $5.5 billion. (See: Google's AOL stake in distress)

In February this year, Time Warner posted a $16.03-billion loss for the final quarter of 2008, compared with a $1.03 billion profit for the same three months of 2007.

Even as AOL now accounts for less than 10 per cent of Time Warner's revenue, AOL chairman and CEO Tim Armstrong has put up a brave front by saying, ''This will be a great opportunity for AOL, our employees and our partners. Becoming a standalone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options.''

''We play in a very competitive landscape and will be using our new status to retain and attract top talent. Although we have a tremendous amount of work to do, we have a global brand, a committed team of people, and a passion for the future of the Web,'' he added.