There was a brief note in today’s New York Times by Michael J. de la Merced, “Suit Accuses Citigroup of Fraud in EMI Deal.” It states the private equity company Terra Firma has filed a lawsuit against Citigroup in connection with Terra Firma’s acquisition of EMI in May 2007 for $4.8 billion. The gist of the action appears to be that Citigroup pretended there were competing offers for EMI whereas in fact there were none, as a result of which Terra Firma overpaid. Terra Firma is run by Guy Hands.
At one time EMI was the world’s greatest record company. Its history dates back to the earliest days of the gramophone record. See Martland, P. (1997). EMI – The First 100 Years. London: B.T. Batsford Ltd. For some years Bhaskar Menon was head of EMI Music world-wide. Ever since the end of the Menon regime, though, EMI has gone downhill. I was an executive at EMI Music during 1981 – 1991 so it has been a source of personal sadness for me to witness these transitions. Here is a brief chronology of its subsequent CEO’s:
1. 1989 – 1998: James Fifield, formerly a General Mills food company executive. Fifield presided over a series of disastrous acquisitions such as that of SBK Entertainment World in 1989 for $337 million and that of Virgin Music Group in 1992 for $960 million. SBK vanished almost immediately. Initially Virgin functioned as a stand-alone, independently-viable company within EMI. There came a time though when it became just another imprint. After leaving EMI Fifield went on to become CEO of the clothing company North Face. In 1999 he tried to take it private in a leveraged buy-out, which precipitated a shareholder lawsuit alleging accounting fraud. He was fired from the company in 2000 as it was on the verge of bankruptcy.
2. 1998 – 2001: Ken Berry, formerly head of Virgin Records. Mr. Berry’s most notable accomplishment was signing the performing artist Mariah Carey. Following Mr. Berry’s departure, EMI paid a reported $50 million to Ms. Carey in exchange for her peaceably leaving the label following the disastrous flop of her “Glitter” album. During Mr. Berry’s regime, EMI’s market share and profits decreased dramatically. [In fairness to Mr. Berry, the record industry as a whole just had begun its tumultuous decline; EMI however declined at a faster pace than the rest of the field.]
3. 2001 – 2007: Alain Levy, a former head of PolyGram Records (and his Vice-Chairman David Munns). During this period EMI’s market share and profitability were eviscerated. EMI responded by repeatedly packaging itself for sale. In 2000 a proposed merger between EMI and the Warner Music Group was thwarted following its rejection by the EU antitrust authorities. In 2001 EMI attempted to merge with Bertlesmann (BMG), then run by Thomas Middelhoff. This merger also failed. In 2003 EMI tried to buy the Warner Music Group, but Time Warner sold it to a private equity group managed by Edgar Bronfman, Jr. instead. In 2006 EMI tried again to take over the Warner Music Group (WMG), precipitating a pre-emptive bid by WMG to take over EMI. Both EMI and WMG are dysfunctional companies. In 1999 Polygram merged with MCA to form the Universal Music Group. In 2008 Sony merged with BMG. There no longer is room in the marketplace for two failing companies like EMI and WMG. It is inevitable they will merge (possibly in bankruptcy court) so they might as well get on with it.
4. 2007: Eric Nicoli, formerly head of United Biscuits, a maker of cookies and snacks. At the time Nicoli was EMI Group’s chairman, which he had been since 1999. It never was clear why EMI needed both a corporate chairman and a chairman of music, seeing as how EMI’s only business has been music since its demerger from Thorn EMI in 1996. EMI’s attraction to former food company executives also is inexplicable, seeing as how the nature of the music business is considerably different than selling groceries.
5. Guy Hands. Terra Firma has been in material default of its loan covenants (the promises it made when it borrowed the money from Citigroup to buy EMI) for some time. In fact it seems likely that the only reason why Citigroup has kept the Guy Hands administration in charge of the company is because nobody else wants to do it.
The theory that a lender is liable to a borrower for making an infelicitous loan has been around since the late 1970s. Like many new legal theories it enjoyed a spate of popularity, only to wane as courts became more aware of its potential for abuse. Other examples are civil liability under the U.S. Racketeer-Influenced Corrupt Organizations (RICO) Act, and lawsuits alleging civil liability against companies (and their management) for alleged non-disclosure of material facts under U.S. securities laws. Here, EMI was represented by sophisticated lawyers, accountants and investment bankers. The theory of its lawsuit essentially is, “we are stupid, we were duped.” This is a non-starter and there is little question in my mind but that the lawsuit will be thrown out of court. In this respect a legal action alleging lender liability really is a company’s last recourse before a more dramatic corporate reorganization, such as a Chapter 11 bankruptcy reorganization proceeding. I am thinking myself of buying it out of bankruptcy court if and when this occurs.