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Seagram Plans Major Revamp

PolyGram, Universal to See Cuts, Closures and Consolidations

November 10, 1998|CHUCK PHILIPS

In the most massive restructuring in the history of the music industry, Seagram Co. has developed plans to slash $300 million in costs annually from the PolyGram and Universal music groups by integrating dozens of business operations in 44 markets around the world. The unprecedented move will result in the shuttering of well-known labels, the closing of plants and warehouses as well as the loss of thousands of jobs.

Some of the nation's best known record labels--including Motown, Geffen, A&M and Mercury--are expected to undergo significant downsizing as Seagram attempts to transform itself into the largest and leanest music conglomerate in the world.

Seagram plans to consolidate its U.S. music division into four large groups and install an aggressive new management team made up of some of the industry's youngest and most successful entrepreneurs, including Interscope Records' Jimmy Iovine and Def Jam Records' Lyor Cohen, sources say.

Internationally, the combined company is expected to rely heavily on the strengths of PolyGram, which has been the industry leader for a decade. The U.S. organization is expected to become a hybrid of both the PolyGram and Universal music groups.

The reorganization--which will follow the December completion of Seagram's $10.4-billion purchase of PolyGram --is expected to begin in January and will take at least until next summer to implement.

Rival music industry executives predict that the combined entity--to be called Universal Music Group--will emerge as a formidable competitor, accounting for at least 25% of all music sold around the world. Analysts suggest that the massive restructuring will provide Universal with unparalleled economies of scale guaranteed to boost operating margins and position the conglomerate for strong revenue growth during the next three years.

"After Universal completes the consolidation, it should be able to outperform anybody in its peer group," said Michael B. Nathanson, an analyst with Sanford C. Bernstein & Co. "Because of its size, it will definitely have the most attractive cost structure of any of its competitors. Guys like Sony or [Time] Warner can't possibly cut costs that deep. Universal will benefit by keeping PolyGram's highly profitable international operation intact and emerge with a leaner, more efficient U.S. operation that should give them the highest margins in the business."

The reorganization is certain to cause management discord and morale problems in the months ahead as Seagram attempts to merge the different cultures and operations of the two companies. Several competing record chiefs said they hope to use that window to raid the company for executives and artists.

The merger radically alters the architecture of the business itself by shrinking the number of global competitors from six to five: Universal, Sony, Bertelsmann, Time Warner and EMI. It is unclear how many jobs will be eliminated in the restructuring, but sources estimate that nearly 20% of the 15,500 workers employed by PolyGram and Universal could be let go. It's not yet clear where the layoffs will occur, but both A&M and Geffen, which are based in Los Angeles, are sure to be affected.

The timing of the reorganization is significant in part because it comes as rising talent costs, consolidation of retailers and economic turmoil in Asia and other world markets have combined to erode music profits. With global demand for music flat and new forms of piracy on the rise, some analysts say it will be difficult for Seagram to sustain long-term growth. Seagram has said it is counting on exploiting changes spurred by the Internet and digital technologies to bolster sales in the future.

The restructuring plan follows months of intense integration meetings between top brass at Seagram, Universal and PolyGram. A blueprint for the U.S. consolidation was drafted by Universal executives Doug Morris, Zach Horowitz and Bruce Hack and submitted two weeks ago to Seagram chief Edgar Bronfman Jr.

A Universal Music spokesman said Monday that no final decisions have been made, but he declined to comment further.

Details about the consolidation plan and management structure are not expected to be announced until late December, but sources say the U.S. division will be divided into four large companies--two on the East Coast and two on the West Coast. Morris, an industry veteran with a track record for discovering and grooming successful managers, has already lined up an ambitious executive team to run the proposed units, although no contracts have been signed.

In Los Angeles, Interscope Group and MCA Group will dominate the landscape.

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