Gemstar deal marks a major gamble
Silicon Valley software company Macrovision Corp. said Friday that it would buy Gemstar-TV Guide International Inc. for $2.8 billion in cash and stock in a bet that consumers will turn to their TV sets, not their personal computers, to manage home entertainment.
The sale to Macrovision, which developed technology to prevent movie and video game copying, was a surprise because experts had expected such bigger names as Comcast Corp. to swallow up the well-known TV Guide magazine publisher and on-screen guide.
The proposed sale ends a five-month effort to find a buyer for the once-hot Los Angeles company controlled by Rupert Murdoch’s News Corp.
Gemstar-TV Guide’s technology helps pay-TV customers navigate the 500-channel universe with an on-screen program guide. But plans to increase its capabilities to handle the combination of television and the Internet never materialized.
In the end, Murdoch wrote down $6 billion of News Corp.'s investment, and a federal judge in Los Angeles found former Gemstar Chief Executive Henry C. Yuen liable for securities fraud for misleading investors and auditors by inflating revenue from 1999 to 2002. Yuen was ordered to pay $22.3 million in fines and forfeitures.
The company’s long decline could give Santa Clara-based Macrovision a big break.
“It’s going to create an opportunity to have a completely new consumer experience about how they’re going to manage entertainment in the home,” said Alfred J. Amoroso, Macrovision’s chief executive.
Amoroso sees TV as the primary device that people will use to display Internet content and personal photos, play music and watch home movies.
Investors reacted negatively. Shares of Macrovision plunged $5.55, or 21%, to close at $20.44 after the announcement. Gemstar fell 99 cents to $4.99. News Corp., which owns 41% of Gemstar, has pledged to vote for the transaction.
Shareholders wasted no time heading to court. One group sued Gemstar, News Corp. and executives Friday in Los Angeles County Superior Court, alleging Gemstar was being sold at a fire-sale price to free up cash for News Corp.'s purchase of Dow Jones & Co.
Partly through acquisitions and partnerships, Macrovision has been moving rapidly beyond its roots of providing copy protection for movies toward developing the technology allowing people to move music, photos and videos to devices throughout the home.
Amoroso said Gemstar’s technology complements Macrovision’s digital strategy.
“Simple discovery is key,” he said. “You’re able to do discovery over what’s stored in . . . on the PC or whatever, and discover what’s coming over broadcast channels.”
As Internet technology is used more to deliver television programming, Amoroso’s company plans to combine TV and Internet and allow consumers to create such tools as personal program recommendations.
Macrovision said it would borrow $800 million to finance the deal. Gemstar shareholders can choose either $6.35 in cash or 0.2548 of a share in the new company for each Gemstar share. But Macrovision won’t pay more than $1.55 billion in cash.
Gemstar’s headquarters will shift to Santa Clara, and company executives said some of Gemstar’s 1,600 jobs, including that of Chief Executive Richard Battista, would be eliminated.
If approved by antitrust regulators and shareholders, the deal would mark another turn in the history of TV Guide, which sells 3.3 million copies weekly.
TV Guide sold 17 million copies weekly when News Corp. bought it for $3.2 billion in 1988. The deal is largely viewed as one of Murdoch’s rare missteps.
But as cable proliferated and made listings more complicated, readers gravitated toward directories on the television itself, where Yuen, a Cal Tech-educated mathematician, claimed hundreds of patents for Gemstar.
Murdoch and his sometime ally, cable magnate John Malone, tried to buy Gemstar in 1998. Yuen rebuffed them and sued TV Guide’s listings channel for infringing his patents.
Rather than fight, “it was easier to merge,” said analyst April Horace of Janco Partners Inc. But the merger was very much on Yuen’s terms, and the 2000 combination cost $14.3 billion.
Gemstar began sliding almost immediately. Growth slowed, patent litigation with other parties continued, and the promised future of more interactive program guides seemed to keep receding.
Investors lost faith after accounting missteps that eventually forced Yuen out.
As News Corp. prepared to buy Wall Street Journal publisher Dow Jones for $5 billion earlier this year, Murdoch put Gemstar on the block.
“The expected cast of characters didn’t show up to buy it,” Horace said.
Analyst Andy Hargreaves of Pacific Crest Securities said it made sense to merge Macrovision’s expertise in managing and controlling content with Gemstar’s ability to present guides.
Hargreaves said the big challenge would be integration: Will the smaller Macrovision be able to pull the pieces together effectively, and if so, when?
“Why should I stick around until 2010 if next year’s going to be a mess?” he said.