CRITICS OF WMG IPO SOUND OFF

It’s not easy to get your ducks lined up when they’re taking pot shots at you. That’s the situation the brass at Warner Music Group are facing as they prepare for an impending IPO, the filing for which was sent to the SEC on Friday (3/11).

Much of the recent criticism from the media and industry gadflies has been directed at the $21 million in salary and bonuses collectively paid to its top dogs, including Chairman Edgar Bronfman Jr. ($6.25m), U.S. head Lyor Cohen $6.24m), International chief Paul Rene Albertini ($4.4m) and outgoing Warner/Chappell CEO Les Bider ($2.44m). The above figures were first published Feb. 21 in the respected Financial Times, which further pointed out that last year's total executive remuneration was more than three times higher than WMG's $7 million operating income for the 10-month period ending last Sept. 30.

These revelations prompted Ritch Esra, Co-Publisher of The Music Business Registry, to fire off an impassioned editorial to his industry mailing list.

“What is so truly disturbing here,” Esra wrote, “is that it speaks volumes about the value system of an owner of a company that would pay its top-five record executives more than three times the amount of operating income for a 10-month period while dismissing 1,600 employees…. In addition to the employee layoffs, Warner Music Group also dropped 93 of the 193 artists signed to Warner labels in the U.S., approximately 47% of the artist roster, during this same period. If the financial health of a company is truly so dire that it calls for these kind of dramatic and severe cuts for the financial well being of the company, how does one justify the kind of staggering bonus payouts to the top five executives in the company? Don't get us wrong, we have no problem with executive compensation when it's tied to actually rewarding performance, but in this case, one is truly hard-pressed to grasp or to understand what is actually being rewarded….

“Ultimately, this just illustrates how Warner Music (and the other labels who subscribe to this mentality in this day age) still have a real commitment to maintaining a broken, malfunctioning business in place rather than seeing what can be done to creatively re-invent it in a new way….”

Esra wasn’t the only irate reader of the FT story. In an open letter to Bronfman, Carlos Anaia, an exiting WMG employee in London, wrote, "We understand that you took on a huge task to turn around the ailing, forgotten division of AOL Time Warner, but informing the already morale-drained staff (via a third party—the Financial Times) that the salary and bonuses that the top five executives took individually equal more than 20 times my total lifetime salaried income (assuming I started at 18 and retired at 60), is somewhat more than insensitive. If you want to make us feel like maggots, you succeeded….”

After Friday’s announcement the WMG had filed for an IPO, vocal industry critic Bob Lefsetz wrote in his long-running, widely read blog: “It is clear that Warner Music is just a financial play. Thomas H. Lee Partners is ONLY interested in milking as much money from the operation as possible. They care about music about as much an Evangelical Christian cares about pornography. It's all a MONEY PLAY!

“That's now obvious. They stole Warner Music. Oh, not literally. But to employ a cliché, Thomas H. Lee and Edgar Bronfman, Jr. purchased the company for a SONG! $2.6 billion was a BARGAIN! But how did they get it so CHEAP??...

“Let's start with Richard Parsons. He's supposed to mop up from the worst merger of all time. Rather than sell off AOL, or address any of Time Warner's old wave magazine businesses, Mr. Parsons decides to sell the MUSIC GROUP! Kind of funny if you think about it. For music requires the LEAST investment for return of ANY entertainment medium…. And Thomas H. Lee and Edgar Bronfman, Jr. could steal the company because everybody else on the Street was too mesmerized by the major label doom and gloom story to see the REAL asset value of record companies.”

Lefesetz closed his critique by asserting that “the people who got laid off from Warner should not be crying in their beer, but savoring the OPPORTUNITY! As should the dropped acts. Now, by playing by a new set of rules, they can OWN THE BUSINESS! Look at Arcade Fire. Maybe they could make it because they're unsullied by the old game. Maybe it's inevitable, the new world will be run by the geeks, the young 'uns. But don't look at the music landscape as half empty, but as HALF FULL!”

In Saturday’s L.A. Times, writers Josh Friedman and Chuck Philips questioned a number of moves made by WMG’s new management team, citing the previously mentioned layoffs, executive payouts, roster cuts and reduced A&R budgets, adding that the company had also “pared wages, slashed investments in new artists, shut offices and quadrupled employees' health insurance premiums” in preparation for the IPO.

“In October, $350 million in ‘excess cash’ was distributed to the group,” Friedman and Philips pointed out. “The investors also were paid the lion's share of proceeds from $700 million in debt offerings floated in December. That prompted credit rating firm Standard & Poor's to lower Warner's outlook to "negative" from "stable" because it rewarded management at the expense of the company's balance sheet. Even Warner Music's admirers in the investment community say that's a problem…. In addition, the investor group collected $75 million in transaction fees. The group is guaranteed $40 million more in fees over the next four years.

“These sizable payments come at a time when cuts throughout the company have removed not just flab but muscle, according to some music industry insiders….”

At the heart of the Times piece was what amounted to a moral indictment. “Sources say the cuts have been notable for their lack of sensitivity. Many senior Warner executives, for example, learned from news releases that they were losing their jobs,” Friedman and Philips asserted.

Finally, Monday morning, the Wall Street Journal reported that the IPO would seek a $4 billion valuation for WMG, “a giant premium” over the $2.6b the new owners paid for the company. “The big valuation is all the more surprising given the still-brutal market conditions in the music industry and the company's own mixed performance,” the story asserted, pointing out that WMG “also carries $2.55 billion in debt.”

While it’s anybody’s guess whether WMG’s IPO will be a boom or a bust, we can say with certainty that Bronfman and company will continue dodging buckshot from all directions on the road to their destiny. They can probably weather further attacks from industry critics, but imagine the damage that could be inflicted on the impending IPO if WMG were to become the subject of, say, a 60 Minutes segment.

Stay tuned...