Company’s Lawyer Nominates ‘Force to Be Reckoned With’

In the early ‘90s, what Robert T. Walston knew about Hollywood could be summed up on a snip of blank film.

Six years later, the former Wall Street hotshot heads one of the industry’s largest and fastest-growing post production conglomerates, a company he transformed from a struggling post-production operation here to a quarter-billion-dollar-a-year powerhouse with offices across Los Angeles and contracts as far away as Asia.

The 41-year-old’s achievements so impressed a committee of judges that in June, they gave him an Ernst & Young Entrepreneur of the Year award. One of 10 regional award recipients, Walston will travel to Palm Springs next month for the announcement of E&Y;’s national winners.

But Walston’s greatest tests may be yet to come. The chairman and chief executive officer of Four Media Co. wants to bring the lessons he learned in Manhattan financial circles to bear on the fragmented, highly unionized world of Los Angeles post production.

He’s betting, he says, that his company can be all things to all people, operate efficiently, and still maintain a high standard of creative excellence.

“I’m on a mission here to make this a billion-dollar business with solid 20% EBITDA [earnings before interest, taxes, depreciation and amortization] margins and [one that’s] the undisputed leader in the industry and a respected and valid partner of our client base,” he said.

He’s already facing a mixed reaction. Though Walston boasts of Four Media’s relationships with its employees, his drive to disband a powerful union led the company into unsuccessful litigation. He’s also failed to thrill investors, who have traded the company’s stock down by half since its initial public offering nearly three years ago.

Still, his vision and determination impress some Wall Street analysts, who say the stock is currently undervalued. He also dazzled Joseph Troy, the securities lawyer who structured Four Media’s initial public offering and who later nominated Walston for the E&Y; award.

“He’s a force to be reckoned with,” Troy said.

The company Walston created does business under about a dozen names, including Pacific Ocean Post, Digital Magic Co., FilmCore, Encore, Riot, TVi and TVP, and Co3. Based in Burbank, with facilities in Santa Monica, Hollywood, San Francisco and London, the company specializes in transforming the raw footage from a television, movie or commercial shoot into the finished product.

Four Media also provides syndicators and cable and pay-per-view channel operators with the facilities necessary to prepare and distribute shows. Finally, it has facilities for archiving and for content restoration and duplication.

The name Four Media stands for the company’s four types of services: television, studio services (archiving and content manipulation), broadcast and syndication, and film and animation. Walston estimated, though, that a full 60% of the company’s business comes out of post-production and special effects work for TV, including commercials.

This all sounds like a long way from Texas, where Walston went to college and business school and where he began his career in corporate finance at a Houston bank.

He left in 1986 for the then-booming world of Wall Street and investment banking. In the late 1980s, while in mergers and acquisitions at Dean Witter, he began to deal increasingly with one client: hedge fund manager Michael Steinhardt. By 1990 he was working for Steinhardt full time.

“He was the pinnacle,” Walston said. “The firm was managing $5 billion of equity capital. The job consumed 20 hours a day, but happily so. I learned all the things you have to [do] to put your own money at risk.”

Walston’s job at Steinhardt Partners was to find, research and analyze acquisition possibilities, and to structure and close the deals. One day in early 1993, a transaction came across his desk that he thought looked intriguing. It was Compact Video Services Inc. in Burbank.

Once an industry heavyweight in post production, Compact was in financially troubled waters and ripe for takeover. Steinhardt agreed to acquire the company and Walston left Wall Street to run the business, renamed Four Media Co.

Challenges abounded. Post production is an industry with both high labor and capital costs, as companies must spend to keep current with the latest technologies and to retain top talent.

But Walston felt Steinhardt’s financial backing gave him an edge others lacked.

“We had the opportunity to build a market-leading company, to leapfrog most of the competition in [technological investments] and to build a diversified business,” he said.

In an industry rife with niche players, Four Media aspired to be a jack-of-all-trades. It’s grown from 300 people and about $20 million in annual revenue in 1993, to about 1,800 people and $224 million in gross revenue today largely by acquisition.

Four Media bought smaller production houses, keeping their names and staff while bringing them under the financial and administrative umbrella of the larger company. Each one specializes in a different aspect of post-production.

In April of this year, the company got a new infusion of cash when Wall Street investment firm Warburg, Pincus Equity Partners took a 51% stake, paying $80.1 million for 10.2 million shares. The move was partly prompted by Steinhardt who, on the verge of retirement, wanted to sell his shares in the company, Walston said.

Troy, the securities lawyer, believes Four Media is now poised to dominate the industry, offering the latest in digital and Internet-related technologies on a cost-effective, massive scale.

“I think this is a sea change in the way” the post production business runs, he said. “This requires a higher level of top professional management. The reason I nominated Rob [Walston] is I think he has the right stuff to accomplish that--to create a multibillion-dollar company in this industry.”

Walston’s approach, though, ran into a rocky patch right at the start. He refused to negotiate with the post production union (a unit of the International Alliance of Theatrical Stage Employees) representing about one-third of the employees of now-defunct Compact Video. Instead, immediately after acquiring and renaming the company, Four Media posted a notice on a Friday asking all employees to reapply for their existing jobs by the following Monday.

Of 304 employees, 301 were rehired, Walston recalled. Some were offered lower salaries than they’d previously had, he said.

Walston could not recall how much lower, but union officials said it was 15%-20%. The union also maintained that a clause in Compact’s labor contract obligated the purchasing company to negotiate in good faith with the union. When Four Media would not do so, the union took the case to court.

Nearly five years and numerous appeals later, a decision in the union’s favor before the U.S. 9th Circuit Court of Appeals forced Four Media to sit down at the bargaining table. Negotiations broke down, however, after four months and the union began a campaign of picketing, rallying and running ads in the trade magazines. That ended with a new labor agreement in March.

“People wouldn’t go to work there for years, on principle, because it looked like a company who didn’t care about their employees,” said Cathy Repola, assistant executive director of the union’s Local No. 700, also known as the Motion Picture Editor’s Guild.

Walston denied that the union battles ever cost the company employees. “We have never had difficulty keeping or attracting employees in our history,” he said.

Both union officials and Walston say they are now working well together. In any case, the issue was never a major one for the company, where 1,700 of the 1,800 workers remain are nonunion, Walston said.

Labor issues notwithstanding, the company caught the eye of the Ernst & Young panel thanks to Troy, Four Media’s attorney.

Each year a panel of about 10 judges reviews dozens of nominations sent in from around Los Angeles and Ventura counties (there are separate awards for Orange, San Bernardino and Riverside counties).

One of the judges, Jon Goodman of USC’s EC2 Annenberg Incubator Project, said judges “look for companies that demonstrate in many ways that they are good companies: in respect to their markets, in the way they treat customers and suppliers, and in the environment they create for employees. It’s never a question of who makes the most money.”

One item they don’t check is a company’s stock price, Goodman said. Many of the companies are private, in any case. But Four Media trades publicly under the ticker symbol FOUR--and lately it’s not been doing too well on the open market.

The stock launched in February 1997 at $10 a share, dipped below $3 and currently hovers around $5 a share.

“It’s certainly been a frustration to me, having accomplished all we have,” Walston said.

Walston said, and analysts who track the stock agree, that his stock suffers because Four Media is a small-capitalization company in a market partial to big-cap corporations. Analysts say investors may also shy away from the stock because the company has grown largely through acquisition--and each acquisition brings with it more labor and equipment expenses.

But Rudolf Hokanson, of CIBC Oppenheimer in New York, stands by his “strong buy” recommendation on the stock.

“Theirs is a sound strategy,” he said. “More and more, the industry wants to deal with fewer suppliers.”

And Walston plans to be one of them. Within five years, he said, he aims to bring one-eighth of the $8 billion worldwide post production market within Four Media’s many walls.

“I’ve gone from being a very Wall-Street-oriented guy to having a vision about creating something,” he said. “I’m challenged by it every day. It’s been a trip.”