New Execs at Gemstar Face a Big Challenge

Now that Rupert Murdoch’s News Corp. has wrested management control of Gemstar-TV Guide International from its founder, Henry Yuen, the challenge is to salvage a business from the wreckage.

Wall Street reacted favorably Wednesday to the management change as investors bid up Gemstar’s shares by 25%, after Yuen agreed to resign late Tuesday and be replaced by an executive backed by News Corp., Gemstar’s largest shareholder.

Gemstar was considered a technology favorite on Wall Street just two years ago, but its stock value has plunged 96% since then, beset by questionable accounting practices and court rulings that undermined the company’s patents for on-screen TV programming guides.

Analysts say Pasadena-based Gemstar, which produces TV Guide and electronic equivalents for navigating through the dozens of channels on TV, may never be worth what it was in 1999, when Murdoch first invested in the company. News Corp. has taken write-downs of nearly $6 billion since March on its Gemstar investment.

“The damage is done,” said Jessica Reif Cohen, an analyst at Merrill Lynch, which has a significant equity position in Gemstar. “It will never be a $75 stock, but it can be a viable business.”

A new management team, led by former News Corp. cable executive Jeff Shell, will take control of Gemstar within the next several weeks. Shell was dispatched to Gemstar as co-chief operating officer in April amid concerns about Gemstar’s accounting problems as Murdoch moved to take greater control of the company.

Shell, who will replace Yuen as chief executive, says a key to Gemstar’s comeback is to retool the company’s electronic guides to make them friendlier for the consumer.

“The bottom line is, when you survey subscribers on what they want from digital cable, the program guide is usually No. 1 or No. 2,” Shell said.

Gemstar’s interactive programming guide is available in more than 15 million homes, including about 8 million with cable set-top boxes and 7 million with guides embedded in their TV sets.

But critics say that Gemstar’s guide is cumbersome and slow and cluttered with advertising that detracts from its use as a search tool.

Murdoch teamed up with Gemstar in 1999 to protect his investment in TV Guide. As digital technology broadened the number of cable and satellite TV channels, consumers were expected to increasingly rely on electronic guides for their listings instead of a conventional resource, such as TV Guide.

So Murdoch and his partner in TV Guide, cable mogul John Malone, sold the magazine to Gemstar in a $8.2-billion stock and debt deal. News Corp. doubled its stake in Gemstar in 2000 to 42% by buying out Malone’s Liberty Media.

For a time, investors saw Gemstar as a pioneer in the convergence of old and new media. At its peak in March 2000, Gemstar’s stock was worth $101, giving the company a market value of about $19 billion.

Gemstar shares closed Wednesday at $3.25, up 66 cents, on Nasdaq, giving the company a market value of $1.4 billion.

TV Guide, still Gemstar’s biggest revenue generator, has declined in circulation from 11 million at the time of the merger to 9 million.

Yuen and his chief financial officer, Elsie Leung, agreed to step down from running the company in exchange for huge severance packages. This came months after bitter internal skirmishes and boardroom disputes, sources said.

Yuen will remain nonexecutive chairman. Leung resigned as CFO and co-chief operating officer but will remain a director through the next year. Paul Haggerty, a News Corp. executive, will become acting Gemstar CFO.