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MGM Deal a Bold Miscalculation for Sony

The electronics giant took only a minority stake in the studio, then lost control of the prize it had fervently sought.

October 20, 2006|Claudia Eller | Times Staff Writer

When Metro-Goldwyn-Mayer Inc. went on the block in 2004, Sony Corp.'s Howard Stringer so lusted after the studio's coveted library that he told his boss he would resign if he didn't win a last-minute bidding war with Time Warner Inc.

Stringer, who at the time headed Sony's U.S. arm, figured the library's 4,000 film titles would give Sony more clout with DVD retailers and fuel the growth of its high-definition Blu-ray technology.

Stringer's resignation wasn't required: He engineered a clever deal to buy the storied studio for $4.9 billion with a consortium of investors that shouldered most of the financial risk.

But the deal that Stringer hoped would help cement his legacy has instead marred it.

In late May, amid rising tensions among the partners, MGM's board voted unanimously to dismiss Sony Pictures Entertainment as its domestic DVD distributor after it failed to meet performance goals. It was a humiliating blow for Stringer, who lost control of the very prize he was after. Sony now finds itself on the sidelines.

Stringer, who declined to comment, acknowledged the fiasco in July at Herbert Allen Jr.'s media retreat in Sun Valley, Idaho.

"Are you happy with the MGM deal?" goaded Michael Eisner, the former chief of Walt Disney Co., who was moderating a panel discussion.

Flanked by rival media moguls Rupert Murdoch and Barry Diller, Stringer made a rare concession for a chief executive: "We screwed up," he told the elite crowd of his peers.

How Sony lost control of MGM is a tale of corporate miscalculation, boardroom drama and power plays.

At a time when private equity firms are using their treasure chests to gobble up corporate assets, Sony's experience as a minority shareholder serves as a cautionary tale about the dangers of hooking up with investors motivated solely by quick financial returns.

The deal hasn't been a total wash. Sony remains a 20% investor in MGM and is sure to recoup its initial $250-million investment. MGM's commitment to Blu-ray remains intact, giving Sony an edge in a format war with Toshiba Corp.'s competing HD-DVD technology. And Sony Pictures gets to share in the proceeds of the James Bond sequel opening next month and a future installment of the popular spy series, which could mean hundreds of millions of dollars in additional revenue.

But being jilted as MGM's DVD distributor in favor of News Corp.'s 20th Century Fox movie studio cost Sony at least $50 million a year in future fees, not to mention public embarrassment in Hollywood and on Wall Street.

The first human casualty came last month, just as Fox officially took over as MGM's global DVD distributor. Sony fired the veteran president of its home entertainment group, Ben Feingold, who had been responsible for selling the MGM and Sony movie catalogs to the Wal-Marts of the world.

Sony Pictures CEO Michael Lynton acknowledges that losing the MGM distribution rights was a disappointment. He attributed the loss to several factors, including Sony's weakness in selling older library titles. "In the course of things, we discovered that distributing catalog was not a strength of ours -- a situation we have since remedied," Lynton said in an interview.

The MGM debacle was particularly bruising for Stringer, who has been fighting battles on several fronts since June 2005, when he became the first non-Japanese chairman of Sony Corp. The 2-year-old Sony BMG music joint venture with Bertelsmann championed by Stringer has been plagued by internal power struggles. Apple Computer Inc., with its iPod, has claim to the most popular portable music device, one-upping Sony, which once had the lead.

Thursday, Sony dramatically reduced its earnings forecast because of the costs associated with a massive global recall of its computer batteries and a price cut in Japan for the new Sony PlayStation 3 game console.

The MGM deal was a bold move for Sony, which normally had approached Hollywood with caution, rarely making acquisitions. Under the deal structured by Stringer and Rob Wiesenthal, financial chief of Sony Corp. of America, the consumer electronics giant put up a fraction of the total purchase price, $250 million, but got control of domestic DVD sales. Sony would collect a hefty annual distribution fee, receive a stake in at least two new James Bond movies and retain the right to eventually buy out its private equity partners.

Yet Sony didn't get a majority stake in MGM. With a 20% holding, it had only three seats on the 13-member board, which includes representatives from MGM and the equity firms.

When DVD sales fell behind projections, a concerned Providence Equity Partners Inc., MGM's lead investor, persuaded the company's board to hire entrepreneur Harry Sloan.

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