Tisch Getting Reputation as Media’s ‘Wrong Way Corrigan’

No matter how lustily they cheer you one moment, an audience can turn sullen and sour the next. That’s a fact well known to show business pros, and one that a relative newcomer to the business, CBS Inc. Chief Executive Laurence A. Tisch, may be learning.

Tisch was applauded mightily for the prices he got when he sold off CBS’ magazine, record and music publishing businesses in 1986 and 1987. But at least some in his audience now say this acknowledged master of corporate husbandry might have missed a run-up in media prices and sold too cheaply.

The critics point out that the magazine division was sold for $650 million in June, 1987, to a buyer who in 10 months had resold it in pieces for a total of $1 billion. The music publishing unit, unloaded by CBS in December, 1986, for $125 million, was resold last January for $337 million.

What’s more, executives such as David Geffen, chairman of Geffen Records, and Bob Buziak, president of RCA Records, believe that CBS could have gotten another $1 billion when it sold CBS Records to Sony for $2 billion in early 1988.

“I just wish Larry Tisch would sell me something,” said Geffen, whose record company is an affiliate of Warner Communications.

Indeed, some industry executives have come to view Tisch as the Wrong Way Corrigan of the media business as they have watched him sell properties when others were snatching them up to build communications conglomerates.

The contrast between CBS and the pack has been striking recently as Time Inc. has agreed to merge with Warner Communications, Sony has prowled for a movie studio, and foreign conglomerates Bertelsmann A. G., Hachette S. A. and Rupert Murdoch’s News Corp. have sought to expand their empires.

“Everybody else has been scrambling to prepare for the competition of global media companies, and CBS has been bailing out,” says RCA’s Buziak.

Tisch staunchly defends the prices CBS got as the best available at the time, or now. He notes that when CBS unloaded the properties, the conventional wisdom was that buyers had overpaid.

“We sold at peak prices,” he says, defining the top price as “what you can get in cash--not in conversation.”

CBS’ asset sales have been a sensitive subject virtually since the board room coup in September, 1986, that gave the chief executive’s title to Tisch. While Tisch had wide support for his plan to restore stability after two years of takeover threats and low morale, some employees, investors--reportedly even directors--opposed a divestiture strategy that they felt ran counter to the original vision of CBS founder William S. Paley.

But Tisch persevered, believing that the non-broadcast divisions weren’t worth the distraction to management. The other businesses hadn’t been as profitable as broadcasting or, like the record business, were dangerously volatile, he felt.

Peeling Away Layers

In peeling away CBS’ layers, Tisch was applying the strategy that earned him profit and praise when Loews Corp., of which he is chairman, took over CNA Financial Services in 1974.

Loews won the insurance company in a bitterly contested takeover battle, then sold off such extraneous properties as CNA’s nursing home, dental supply and second-mortgage businesses. With a tighter focus, CNA boomed.

Apparently with that success in mind, Tisch sold CBS’ 21 consumer magazines in June, 1987, to an investor group that included CBS Magazines Chief Executive Peter Diamandis, other managers and the Prudential Insurance Co. The magazine group was one of the biggest around and included such titles as Woman’s Day, Stereo Review and Car & Driver.

The price of $650 million was dizzying when considered as a multiple of the company’s cash flow, the standard often used to measure such deals. (Cash flow is net income plus depreciation and other non-cash charges.) The price represented 14 times CBS Magazines’ cash flow at a time when other magazine companies were going for between eight and 10 times cash flow.

Some in the industry wondered whether Diamandis would be able to pay off his prodigious debts.

A disappointed bidder was Hachette S.A., the French publishing conglomerate that was searching the world media market with hungry eyes. Hachette officials had opened talks at a price under $500 million, moved up to $570 million and then “wouldn’t go a penny higher,” says Tisch.

Within a few months of the sale, the newly formed Diamandis Communications Inc. sold off seven of its new titles in several deals. Then, to everyone’s astonishment, Diamandis announced that Hachette had bought the remaining 14 titles for $712 million. It was $142 million more than Hachette had previously bid for the whole 21-magazine group, and it brought the Diamandis group’s gross profit from the magazines’ resale to $350 million.

Hachette topped its earlier bid partially because Diamandis had cut overhead to streamline the company. But the higher bid was also a sign of a growing interest in magazine concerns and the steady stream of cash they provide to companies that own them.

That new interest has helped lift prices for top magazine properties to between 12 and 14 times cash flow, investment bankers say.

The most striking example of the new demand for top-tier magazines came last August, when Rupert Murdoch paid a dizzying $3 billion, or 15 times cash flow, to buy Triangle Publications, owner of TV Guide.

Defends Prices

Diamandis defends the price he paid and the one he got. “When I bought, I made CBS look smart; when Hachette bought they made me look smart,” he said. “In a couple of years, the French will look smart, too.”

Tisch seems less sure of that. He considers Hachette’s purchase a “fluke.”

“By any standard of business, they overpaid,” he said. “But if they’re happy, fine. I can’t be responsible for what people do.”

Some people wondered whether a partnership called SBK Entertainment World overpaid when they bought CBS’ music publishing business, called CBS Songs, in December, 1986. The $125-million price set a new record for music publishing companies, which own the rights to songs and profit by collecting royalties when anyone plays them.

CBS Songs had an inventory of 250,000 titles, including such timeless tunes as “Singing in the Rain,” and “Over the Rainbow.” But the unit had never been of much interest to CBS’ top brass; some insiders said flatly that it was poorly managed.

So Tisch was happy to agree when CBS Records boss Walter Yetnikoff suggested that the company open negotiations to sell the property.

When SBK outbid a management-led investor group to win, it began streamlining the company and got more aggressive in making anybody who used its songs pay up for the privilege.

As a result, the partnership quickly drove up a key measure of its profitability, the so-called net publisher’s share, or revenues minus artists’ royalties. Within two years, net publisher’s share rose 70% to $37 million.

But those improvements were part only part of the reason that Thorn/EMI, a London conglomerate, was willing to buy the company last January for three times what SBK paid for it.

Heating Up

The other key factor was the market for music publishing businesses, which was heating up rapidly. Music publishers’ profitability had begun to rise because of an increase in the standard royalty that publishers receive and an explosion of foreign demand for Anglo-American songs with the wider international penetration of television.

While these publishing units formerly sold for four to eight times their annual net publisher’s share, now some were going for 11 times that figure, or more. Among other pace-setting deals was Warner Bros. Music’s 1987 purchase of the 400,000-song Chappell & Co. for about $250 million.

Tisch says he can’t take responsibility for the CBS Songs deal, since the price was negotiated by Yetnikoff and the divestiture had been approved by his predecessor, former CEO Thomas Wyman, when Tisch joined the company.

Still, he defends the price. “It looked like a hell of a sale at the time,” Tisch says.

CBS Records’ sale price of $2 billion looked equally impressive when CBS negotiated the deal with Sony Corp. in December, 1987.

Indeed, it seemed startlingly high compared to the $1.25 billion that Tisch initially asked. Some wondered whether the Japanese company hadn’t gone too far in its desire to buy up the “software” needed to complement its audio hardware.

But some evaluations changed as the surging profits in the record business helped drive up prices and sparked buyers’ interests. Last year turned out to be a red-letter year for the industry, partly due to continued strong domestic sales of CDs and partly to the growth of demand for American music overseas. Many executives in the business expect the gravy train to keep rolling.

“CD players are in 12% of homes, but by 1995 that will be 60%,” says record and movie magnate Geffen. “A lot more players means a lot more CDs.”

Shared in Prosperity

CBS Records has shared in the prosperity. Its pretax earnings surged to $340 million in 1988 from $187 million in 1987. Chief Executive Yetnikoff has told associates that, so far this year, the company’s sales have topped those of 1988 on a month-to-month basis.

Tisch, like some other analysts, is not nearly so bullish. CBS had a management consultant study the future of the music business, he says, and decided that the profitability of CDs would fall off sharply.

“We were making $4 a disc, but new capacity comes on, competition comes in--these things never last forever,” he says.

Tisch says CBS Records’ recent profits are misleading. While 1988 pretax earnings reached $340 million, over the past five years earnings averaged about $125 million, he says. And before the sale, CBS executives were concerned that the labels of competitor Warner Communications were eating into its U.S. market share.

Tisch maintains the CBS Records deal is better than most outsiders have recognized because the contract provided that more than $200 million in CBS Records assets would revert to CBS. By that measure, CBS actually got $2.2 billion for the property, Tisch says.

Many analysts and industry officials sympathize with Tisch’s view that CBS sold near the top, got good prices and shouldn’t be faulted for later changes in the market.

“J. P. Morgan made a fortune selling too early,” said Ernest Levenstein, analyst with Shearson Lehman Hutton.

Tisch is certainly making no apologies for selling off CBS’ non-broadcast properties, though most of the media herd is thundering in the opposite direction. In his view, arguments about building worldwide media powers are “nonsense.”

“How do our magazines help anybody compete worldwide?” he asks. “Knowing in hindsight what I do today, I’d do it all over again.”