Today’s Los Angeles Times carried an interesting analysis of the transaction by which Sony acquired certain assets from MGM, Eller, C., “MGM Deal a Bold Miscalculation for Sony,” Los Angeles Times (Oct. 20, 2006). As is the fad these days, Sony did not use its own money – rather, it turned to a consortium of equity investors, and ended up owning only 20% of the company. The main asset that any company acquires in this type of deal is distribution rights, and I’m sure Sony thought it had air-tight contracts granting it distribution rights for – well, for a long time, at least. So you can imagine Sony’s surprise, and I don’t doubt for an instant that it was heart-felt, when MGM discovered a clause in its contract permitting it to bail on Sony distribution, if certain DVD sales targets weren’t met.
Now, the reason why these targets weren’t met probably has as much to do with the maturation of the DVD market, as with any intrinsic “weakness” in Sony’s DVD sales force. Obviously it’s the “title” that drives the sale, together with all of the ineffable elements it comprises (who’s in the movie, the directors, the plot, the reviews, what your co-workers at the office thought of it, etc.). In my experience, even the best sales force in the world won’t be able to load in, say, 15% more quantity, than consumer demand otherwise would dictate.
But for whatever reason, MGM used this clause to terminate its contractual relationship with Sony. Sony, of course, still remains an investor in the company – but with a minority stake. The last place you want to be is holding a minority stake in any business venture, particularly an entertainment company. ‘Cause you have zero effect on what’s going on; your destiny is way outside of your hands; and you’re just along for the ride.
When I was at EMI, and the Warner Music Group, I had a policy that we never would acquire less than a 50% stake in a company, together with an option to buy the rest at the end of, say, five years. The five years were kind of like a “trial marriage” – to see if everybody liked each other. At the end of five years, the management of the acquired company had to make an offer to buy our half. We then had the option either to (a) accept that offer; or, (b) buy their half, at the same price. This self-calibrating mechanism insured that the sales price pretty much would be a good reflection of what the company was worth. It’s interesting to note that this schematic came to be adopted for many transactions at other companies that I had nothing to do with, e.g., Warner Music Group’s acquisition of Rhino Records; and EMI’s acquisition of Priority Records (which occurred after I had left the company). For whatever reason, I am not aware of a single instance in which this mechanism did not result in the small, independent label buying the large, multi-national record company’s half interest; rather, it always seemed to work the other way around.
Incidentally, if you’re the senior management of the acquired company, you better not keep a lot of personal belongings at the office. Richard Foos, for example, was unceremoniously dumped as CEO of Rhino shortly after the Warner Music Group’s acquisition, as was Bryan Turner, formerly head of Priority Records.
I think this is a mistake by the acquiring record company, as it loses whatever verve and vivacity compelled it to acquire an interest in the small, independent label, to begin with. The history of major record company acquisitions of small independent labels is a history of amalgamation and digestion. For example, EMI acquired half of Chrysalis Records in 1989 for $79.1 million, plus more, depending upon performance, “Chrysalis Deal Made by Thorn,” New York Times (Mar. 23, 1989). At the time, Chrysalis was an on-going, vibrant label. It had its ups-and-downs, but it was a presence in the marketplace with its own A&R philosophy, promotional team, and label identity. EMI, however, simply absorbed it into one of its other label ventures, and all that’s left today is a logo and some old Jethro Tull masters. Quite a lot to pay, if that’s what you end up with. In fact, now that I think about it, the same thing happened with all of EMI’s label acquisitions, including: SBK; Enigma; and Priority.
The other interesting instance of a corporate revolt recently was the rebellion at the Los Angeles Times, in the face of potential cut-backs by the Tribune Co., its corporate parent. Jeffrey M. Johnson, the Times’ publisher, was issued his walking papers as the Tribune attempted to clean up the mess, Mulligan, T. & Rainey, J., “Tribune Tightens Grip on L.A. Times, Los Angeles Times (Oct. 7, 2006). Decapitation is the usual fate of the leaders of any form of corporate insurrection – for the simple reason that the President or CEO (or whomever, the title isn’t the issue) serves at the pleasure of the Board of Directors. And, in principle, at least, the Board of Directors is elected by the shareholders. Note carefully what was happening here, though – Tribune Co. owns 100% of the Los Angeles Times. Whereas, Sony only owns 20% of MGM. Thus, a vivid illustration of the hazard of the minority position. I’m sure Howard Stringer (head of Sony) wishes he could be as peremptory with Harry Sloan (head of MGM), as the Tribune Co. was with Mr. Johnson.