Key3 Execs Irrepressible but Not Irreplaceable
In a perfectly logical world, a group of executives whose company had tanked on their watch would be wary of claiming that the enterprise could barely survive any longer without them.
Having informed their shareholders that they were about to be wiped out in bankruptcy, and having told their bondholders that they would soon get a haircut that would make a squad of Marines by comparison look like the guys from Aerosmith, these executives might be careful about threatening to walk if their salary demands were not met.
The bosses of the Los Angeles technology trade show company Key3Media Group Inc. do not live in that world.
In the wake of their company’s Feb. 3 filing for Chapter 11 bankruptcy protection -- partially the result of questionable managerial moves such as buying out other trade shows at top-of-the-market prices and taking ridiculously high salaries -- they have asked a Delaware bankruptcy judge to approve a package that would guarantee them an average of as much as $780,000 each over the next 12 to 14 months. That’s more than the chief executive gets paid at their nearest competitor, Penton Media Inc., which is not under bankruptcy protection.
The rationalization of special status for highly placed executives is becoming a dishearteningly common occurrence in Bankruptcy Court, which often is more adept at preserving executive sinecures than protecting retirement funds and health benefits for rank-and-file employees.
At first glance, the claim that the skills of the sitting CEO, chief operating officer, chief financial officer and general counsel are all that stand between the company and total oblivion sounds compelling. The argument generally runs that, as long as management remains properly “incentivized,” they’ll do their damnedest to get the corporation back on its feet.
But does that apply to Key3?
The company is best known as the owner of Comdex, the annual trade show that brings swarms of high-tech devotees to Las Vegas each fall. For most of the last three years, or since it was taken over by Los Angeles entrepreneur Fredric D. Rosen, Key3 has been taking it on the chin.
Rosen, who made his name by building Ticketmaster into a nationwide near-monopoly in the live-entertainment ticketing business (and selling it to Barry Diller for about $400 million), hoped to expand Key3 beyond Comdex and other technology trade shows, perhaps even turn it into an entertainment conglomerate; at one point he contemplated making a bid for the concert-promotion company House of Blues.
But things did not work out that way. Among Key3’s ills, Rosen likes to stress the Sept. 11 terrorist attacks, which wiped out so much business travel. In truth, though, the problems started much earlier. The bursting of the tech bubble began eating away at attendance and the exhibitor rosters at Comdex and Seybold Seminars, Key3’s other big trade show division, starting in 2000. By the end of 2001, Key3 was being crushed by debt -- much of it still on the balance sheet today, as indigestible as a Big Mac. The company’s stock was delisted from the New York Stock Exchange for poor financial performance in July 2002.
Moreover, no one among Key3’s creditors expects Rosen or most of his team to remain in place for any great length of time -- possibly as little as four months, under a plan that Rosen is promoting to allow the San Francisco merchant bank Thomas Weisel to take over the company.
Of the six executives covered by the compensation application, only two had trade show experience before Rosen’s arrival. The other three had worked with him at Ticketmaster.
Then there are the numbers themselves. Rosen and his team have been dramatically overpaid compared with rival executives in the trade show business. The incentive plan perpetuates the discrepancy, albeit on a smaller scale.
In 2001, Rosen pulled down $1.5 million in salary to run Key3, which had $250 million in sales. This was 2 1/2 times the compensation of the CEO at Penton Media. Penton recorded revenue nearly 50% higher than Key3’s that year but paid CEO Thomas L. Kemp a mere $650,000. (The compensation of the other top executives at Key3 was commensurately out of line with their counterparts at Penton.) Last year, Penton sponsored 50 trade shows, twice the number operated by Key3.
One media executive who did slightly better than Rosen in 2001 was Harold McGraw of McGraw-Hill Cos., who received $1.6 million. Of course, his company posted revenue that year of $4.6 billion and profit of $377 million.
Reading the Key3 executives’ application for the new pay plan, you would think that the money they had earned on the job scarcely compensated them for the pain and anguish the company’s condition inflicted on them.
Their compensation, they plead, “did not consider the additional pressures and uncertainty associated with a bankruptcy filing,” as though Chapter 11 were not the consequence of management performance but an act of God, like an earthquake.
Rosen -- who did take a $300,000 pay cut last year -- expresses perplexity that anyone could consider the pay request untoward. “This is basically a reduction of our salary for the balance of the year to go through a transition with the people who are buying the company,” he told me.
It should come as no surprise that Key3’s creditors have not responded with an outpouring of sympathy.
“The whole thing is not standard and doesn’t pass muster,” says Jordan Teramo of the New York investment firm Mackay Shields, a member of the committee of unsecured creditors. “I’m going to be looking very carefully at anything they’re going to pay any of these guys.”
As for the executives’ assertion that they need to be guaranteed a payout to avoid being lured away by competitors, that drew a horselaugh from the Sands Convention Center, a Las Vegas creditor whose chairman, Sheldon Adelson, has engaged Rosen in litigation previously.
“The debtors find themselves in Chapter 11 because their senior management is not, for the most part, experienced in the trade show business. It is unlikely that competitors ... would be recruiting this senior management,” the Sands said in court papers.
That sentiment goes straight to the heart of what happened at Key3Media. Some critics say Rosen simply may not have been cut out for the trade show biz. Rosen, whose picture, I believe, appears in the dictionary next to the entry for “chutzpah,” had put his unrelenting argumentativeness to good use in building up Ticketmaster. He signed up scores of concert venues for his ticket sales service by cutting in landlords and music promoters on a share of the higher prices he was charging audiences.
And he made an art form of service fees, which can add as much as 30% to the price of a ticket. Although buyers might have felt mulcted, promoters seldom complained because they got their share.
And when members of the rock group Pearl Jam tried to fight Rosen by setting up their own tour without Ticketmaster’s participation, they failed. A federal antitrust investigation similarly fizzled out.
When he bought into Key3 in 2000, Rosen may have been thinking that the trade show business was ripe for the same sort of consolidation that had made him more than $70 million in concert ticketing.
But trade shows are a much more diverse industry than live music, and the customers -- technology companies exhibiting their wares to buyers -- demand service for their money, unlike teenage concertgoers.
Rosen, fond of ascribing his business mien to the study of Sun Tzu’s “Art of War,” could not gain much traction with the buttoned-down engineers who were wielding the exhibition budgets at companies such as Microsoft Corp. and IBM Corp.
“Fred’s style is very direct, and they were the kind of guys who liked to schedule meetings,” recalls one former Key3Media executive.
That’s ancient history now. The executive compensation plan, along with several other aspects of the bankruptcy filing, will be the subject of a hearing in Delaware next week.
Indications are that the Rosen team’s true value to the crippled company will come under discussion, especially given that its manifest destiny is to be sold to someone else.
“This management’s role going forward,” says one creditor, “is only to turn over the keys.”
Michael Hiltzik can be reached at golden.state @latimes.com.