Four ways to fix MGM
Commentary: Selling the company might not be best optionFollowing my graduation in 1960, I was hired by Columbia-owned Screen Gems International as a very junior administration and sales executive.
It was during the mid-'60s that a friend suggested to someone at CBS that they offer me a job and, as I understood it, their reply was, "Why would we want to hire a film peddler like Norman?"
Eventually, I managed and sold billions of dollars of content for Columbia (twice), CBS, PolyGram and MGM/UA, but I always have remained a film peddler. My education in this business has lasted 50 years, and though it is not brain surgery, it is not as simple as my bosses often thought it to be.
Every company I ever worked for -- with the exception of CBS, where the broadcast business was a license to print money -- believed it was just one theatrical hit away from solvency. (Even the Eye got enamored of the film biz, eventually crashing and burning with its ill-fated Cinema Center Films.) These losses were far from fatal.
During the early '70s, Columbia was a mess and counting on the Ross Hunter-produced "Lost Horizon: The Musical" to save it. The movie tanked, and the company changed hands.
In 1986, I was hired by MGM/UA chairman Lee Rich to run those companies' ancillary rights divisions. My job was the most fun as well as the most difficult of my career.
MGM/UA was in a variety of businesses. They operated two theatrical production companies (MGM and UA), a theatrical distribution company and a network television production company in addition to the ancillary rights units. There was nothing particularly difficult about that except the overhead was enormous these operating companies.
But that was not all.
In addition, there was enormous overhead in the corporate group, starting with the chairman and the president but including an array of highly paid nonrevenue-producing people.
The network production people were talented and had a considerable amount of programming, but we were hemorrhaging cash to support the activity. The other bad news was this programming was not of the type that could be successfully syndicated, which didn't seem to matter to owner Kirk Kirkorian or the company's senior management.
Most important, there were the interest and principle payments we needed to make to the banks for a billion-and-a-half dollars in loans plus operating capital.
At some point, I suggested to the chairman that unless we made successful motion pictures, our library could not generate enough money to support the operation. Sadly, I was not wrong: Although we did make some profitable movies, we were not financially OK.
It all sounds eerily familiar, right?
I departed MGM deposed primarily by a 31-year-old lawyer named Kenin Spivak, who was very bright and believed he had the intellect and experience (he had none) to get along without me. He wanted to exercise his authority over the operating divisions I ran. Welcome to America.
Following many more years of trauma and ownership changes, the Lion was purchased five years ago for almost $5 billion. An assemblage of lawyers, accountants and MBAs were, to my mind, responsible for this overpayment.
This consortium of Sony, Comcast and private-equity firms TPG Capital, DLJ and Providence Equity still struggles with upward of $3.7 billion in debt -- interest payments alone total $250 million a year. MGM was bringing in about $500 million a year in license fees from its extensive film and TV library, but purportedly the economic recession has reduced this amount substantially.
Given its mounting problems, MGM last year replaced CEO Harry Sloan with Stephen Cooper, a corporate executive who guided Enron through its post-2001 bankruptcy and subsequently oversaw the restructuring and growth of Krispy Kreme Doughnuts.
Cooper's job is to dispose of the Lion in as expeditious a way as possible and make the lenders as whole as possible -- a tall order.
What is clear is that MGM/UA can't compete in an industry dominated by the really big guys: Time Warner, NBC Universal, CBS/Viacom, News Corp., Disney and Sony.
Short of selling the company outright -- a process that seems to be going nowhere fast -- here's what I would recommend:
1) Spin out the valuable MGM and UA names. That can be accomplished, say, by doing a deal with a well-capitalized overseas media company and have it finance, produce and distribute movies.
2) Set up a stand-alone television distribution company and acquire rights to additional product from third parties.
3) Get out of the motion picture production and distribution business. This will dramatically reduce overhead and risk.
4) Get rid of the corporate infrastructure and farm out accounting and other administrative functions to third parties.
This, in my view, would be a far better course of action than selling the company and would allow lenders to collect most, if not all, of their money.
Still, now as then, practically everyone involved in this operation has an agenda, so what ends up happening to the Lion is anyone's guess.
Norman Horowitz has been a divisional president at Columbia, Polygram and MGM/UA and now is a writer and media consultant. He can be reached at thenohoco@ roadrunner.com.