Analysis
By Jeremy Scott-Joynt BBC News Online business staff

Little more than two years have passed since America Online used its hugely valuable shares to mount the biggest new economy takeover ever, absorbing Time Warner to turn itself into a $290bn (�190bn) mammoth.

The merger is dead... It's a story we love to talk about, but it was one of the biggest blunders committed in merger history Ajay Mehra Columbia Management

But Robert Pittman, the key AOL boss who promised synergies between Warner's huge if sometimes under-performing media properties and the brave new world of the internet, has now departed - to be replaced by veterans from the Warner stable.

Goodbye, whiz kids working on internet time. And welcome back, old hands who can cope with a shocking market crunch, a tumbling share price, woeful advertising revenues and allegations that the company has been flattering its figures.

From boom...

AOL Time Warner's problems are symptomatic of the hubris that gripped so many during the dot.com glory years of the late 1990s.

Everyone was talking of a "new paradigm", the transformational effect of the internet on every segment of USA Inc.

Whiz-kid Pittman is on the way out

So when in early 2000 America Online - the US's number one internet service provider, but still a comparatively young company - announced its soaring share price meant it could easily afford to merge with venerable media conglomerate Time Warner, the deal raised few eyebrows.

The theory was that Time Warner's vast library of content could be lucratively piped to the waiting masses of AOL subscribers.

Amid the general euphoria, the eye-popping numbers - the deal cost AOL shares worth more than $106bn - were simply par for the course.

For the pessimists, it looked as if the lunatics had taken over the asylum.

...to bust

How are the mighty fallen, though.

First came the dot.com bust, as investors began to take a good look at the promises made by the boosters - and found them wanting.

Share prices fell sharply, companies went bust, and the survivors began to pull in their horns.

Then as the billions piled into internet start-ups and now-shaky strategies effectively evaporated, and huge over-supply in traditional industries made itself felt, the economy faltered.

That dealt a fatal blow to the advertising market on which much of AOL Time Warner's revenues rely, just as the debts built up in the boom years began to weigh heavy on its books.

Investors lost confidence in its bosses, and one by one the "new economy" types began to drift away.

The new CEO has a big task ahead

And the share price toppled from the sky-high levels that had made the ill-fated merger possible in the first place, slumping from its late-1999 peak of $94 to just $12.45 by Thursday night.

"The merger is dead," said Ajay Mehra, portfolio manager at Columbia Management.

"It's a story we love to talk about, but it was one of the biggest blunders committed in merger history."

Back to reality

Now, with second quarter figures due next week, AOL faces a long and rather shamefaced reconstruction after the departure of Mr Pittman, whose job it had been to find ways to help the AOL internet unit out of the vicious advertising crunch.

At least the people now at the top are more reliable, some investors feel.

"It's sort of the completion of a return to a more conservative, traditional approach of the old Time Warner," said SG Cowen analyst Peter Mirsky.

If that isn't bad enough, it also finds itself facing the same kind of embarrassing - at best - accounting problems that have put corporate probity in the spotlight.

The Washington Post newspaper has accused AOL of using unconventional business practices to book an additional $270m in profits during 2000-02 by shifting profits from one division of the AOL internet unit to another over a three-year period to 2002.

The paper also alleged AOL sold ads for online auctioneer eBay but booked the profit as its own.

AOL has denied the report, saying the story "was flawed in its facts and analysis and misleading in its conclusion".

Facing a potential cash crunch because of the dramatic fall in advertising revenue, AOL used the dot.com collapse to its benefit by "renegotiating long-term contracts it risked losing into short-term gains that boosted its quarterly revenue," the Post said.