Chapter 23
Ahmet's ten-million-dollar rug bazaar ... First drafts and epitaphs ... Steve Ross's figurines ... Warner Communications and Wile E. Coyote
JAC: Six months after my meeting with Steve Ross there was still no word from Kinney.
I was invited to keynote the National Association of Record Merchandisers convention in Miami on March 21, 1970, and while there I visited with Jerry Wexler, who kept a winter home in Florida. Jerry, as one of the three principals of Atlantic, had been dealing with Ross now for about a year. I said to him, "I had a terrific meeting with Steve and haven't heard a peep since. Other companies have been circling but I really don't want to do a deal elsewhere." Jerry promised to look into it. About an hour later Mel Posner called. From the sound of his voice I could tell it was bad news. Hesitantly and with compassion Mel told me that my dad had died. Though it wasn't unexpected, it was still a shock and took a while to sink in. Just a few weeks earlier I had sat on his bed, holding his hand, and told him that I loved him. I don't know if he understood but I needed to say it anyway, for both of us.
Jerry handed me a stiff glass of brandy. I pulled myself together and grabbed the first flight to New York. George met the plane and drove Keith and me to my mother's apartment. The funeral service was held at a chapel owned by Kinney, which I thought ironic.
JAC: In late May, Ahmet Ertegun asked me to meet with him and Alan Cohen, Executive VP of Kinney, to move the merger talks forward. I've always felt safe with Irwin Russell at my side, so I asked him to join me at Kinney headquarters in Rockefeller Plaza. We were shown to Alan's office. Ahmet made the introductions and we got down to it with no time wasted.
Alan had an open face and a wide smile. Irwin and I liked him immediately. He was pleasant, smart, non-confrontational, and had done his homework. I repeated the concerns I had expressed to Steve about distribution, autonomy, and potential anti-trust problems with the Justice Department. Alan nodded his understanding and asked what we were looking for. Without a blink, I said, "$10,000,000."
I didn't think this was out of line for a company that was netting, pre-tax, $2,500,000 annually. I took my after-tax net earnings and multiplied them by a factor of between eight and ten, which was the conventional formula for valuing record companies (before the investment bankers got involved). Ahmet assumed his best bazaar bargaining manner, half horrified and half bemused, and began picking the company apart. Except for the Doors, Judy Collins, the singer-songwriters, and Nonesuch, he didn't see that much value. To which Irwin said, "If that is the case, why are we here?" Ahmet continued to buy and sell a rug. He tried a counter offer of $8,000,000, and after a few hours we had worked him up $9,500,000, but still had no deal. So I said, "Why don't you gentlemen think about it, because the number is not going to change. It's a fair number which you'll be able to pay out of our future cash flow"—which Alan Cohen knew all along. Elektra was the ideal acquisition, profitable and throwing off predictable cash. Steve would be buying cash flow and the belief that I would find other major artists.
Irwin and I left the building with a sense that Alan wanted to do the deal and was slightly embarrassed about Ahmet—or that perhaps they had planned to play good cop-bad cop from the beginning.
I was out of the office the next morning when Alan called. I dove into the quietest phone booth I could find, scrounged my pockets for change, and called back. Alan said, "Is it okay if we talk without your lawyer?" I said, "Fine." Alan continued, "I don't know record company values, maybe Ahmet is right, maybe you are, but the point is that we like you, we think we can do good things together, and it makes sense to bring Elektra into the group since your repertoire meshes nicely with Warner and Atlantic. We'll pay you the $10,000,000."
JAC: Nina received five percent of the company as part of our divorce settlement.
NINA HOLZMAN: When Jac was in the process of selling, he called me one day and said, "I need your stock in order to make the sale." And I had about thirty seconds of complete and utter power. Then I said, "Well, I'm not going to do anything to queer your deal." It all got straightened out.
JAC: The arrangement was a "follow-on," a go-along clause. Whatever I got, Nina would get five percent of. And of course, with my ninety percent of the company in play, I could be expected to try hard for a good price, and Nina would benefit from it in proportion. At $10,000,000, that was $500,000. I agreed to pay her $100,000 a year for five years, with a generous interest rate, so she would have a steady stream of principal and interest.
JAC: There was still something that Alan needed to work out and he needed my help in structuring the arrangement. In 1970, any acquisition of $10,000,000 or more automatically went to the Justice Department for review. Did I have any ideas? My thought had been to keep my publishing and the rights to the sound effects library, which were owned in a separate company, the Dyna Corporation. But I agreed to sell Dyna for $200,000 and Elektra for $9,800,000 in a deal that mixed cash with convertible debentures. The $10,000,000 was to be paid out, $1,000,000 on signing, $2,000,000 during the second year, plus $7,000,000 in notes, convertible to stock at $32 per share. At that time the stock was selling for around $24. If the stock price rose higher than the convert price, I could convert and I would see additional profit.
The next meeting was just Alan, Irwin, and myself, and we hammered out the fine points in a few hours.
In every merger there is a ritual called "due diligence" in which the seller's business, legal, and financial representations are reviewed by the purchasing party. Normally a process that takes several weeks, ours consisted of a succinct financial overview given by Jack Reinstein to the Kinney CFO. Our three years of financial certification had paid off. Alan Cohen accepted Irwin's word that all was in good order with legal title to the masters and that there was no pending litigation. It was the right gesture of confidence. I trusted Alan and he trusted us.
Along the way I briefly had second thoughts about distribution and the autonomy issue, so I met privately with Jerry Wexler. We reviewed Atlantic's sales experience at the Warner Bros.-owned branch in Los Angeles, the only such operation within the record group, which elsewhere was still handled by independents. Jerry's comment was a masterpiece of understatement: "The worst branch distribution is superior to the best independent distribution." And he eased my mind about the new partnership. "Jac," he said, "I would never let you get into something that's going to be bad for you. These are good people. Even Ahmet is impressed."
I had long admired my new business associates and I liked Alan Cohen and Steve Ross. Steve was always in awe of how quickly I got information and absorbed it, and I was equally in awe of how he dealt with numbers, how he could read a balance sheet. Steve could look at a wall of numbers and tell you, "That one's not right," and then tell you why. Steve was also fully committed to letting people do their own job. I only needed to see him once during the entire dealmaking process, when I was suffering through my moment of seller's remorse, and he sweetened the deal slightly to ease me over the hump.
The first draft of an agreement generally tells you if you really have a deal. If a draft comes in fairly reflecting what you have agreed to, it moves forward smoothly. If it comes back reading as if it was prepared by a bank, you have problems. The papers were nearly perfect. Irwin and I sailed through them in about two hours.
One open issue was our position in the hierarchy of Kinney's long-term debt structure. Frank Sinatra had sold his Reprise label to Warner in a similar deal and I was satisfied to be put on the same payment footing and schedule. A few other very minor points were cleaned up in a five-minute phone call.
A final quirk remained. We had agreed on stock options for me in the parent company, and a five-year employment contract at $200,000 per year, with a review at the end of three years. The quirk was in the employment paragraph which came back written for a three-year term with a two-year option on their part. Irwin puzzled over this for a moment and said, "I'm sure we can get it to five." I said "No. Maybe they'll forget to pick it up." In my mind—always in my mind—was my secret commitment to myself to be gone to Maui. In 1968 I had set a goal of five years on, which meant 1973. Selling to Warner in 1970 with a three-year term of employment also came out at 1973. If three years was enough to strengthen Elektra I might actually get to Maui on time, and have the option to either continue or move on with my life. I told Irwin to let it ride.
JAC: Within Elektra no one knew what was happening, not even my super-discreet secretary Pearl. My main concern was to get the agreement done quickly, to avoid leaks that might cause problems with artists and staff. Alan had promised to push the paperwork and we had seen the first drafts in about a week.
Then the phone began to ring. Abe Somer, who represented A&M and the Doors, heard something. Abe was quick and smart and opportunistic, always looking out for himself. He said, "I hear you're selling the company to Steve Ross. It's the worst possible thing you can do. They don't have any money. Have you looked at their SEC documents? Kinney is on the verge of bankruptcy. I can get you a better deal"—which meant he wanted to represent the deal and take a piece for himself. I bit my tongue, listened, and said in a quiet but firm voice, "Abe, I'm not discussing this with you." He said, "Well, your artists are going to be very unhappy," and hung up.
Within three weeks, start to finish, we had the papers completed. Signing was on July 22, 1970. My set of documents weighed about four pounds and filled a substantial corrugated box. As we were leaving the Kinney building, with me clinging to my check, notes, and debentures, a security guard stopped us and refused to let me out until Alan and Steve vouched for me. "Now I understand your strategy," I said, straightfaced. "I could have gotten twice the amount, signed the papers, and they would have never made it out of the building."
Steve took us for a celebratory lunch at Club 21.
Elektra joins Kinney/Warner Communications. Irwin Russell, Jac, Alan Cohen
JAC: Ellen accompanied me to the signing ceremony wearing a clinging tangerine-colored summer smock.
ELLEN SANDER: I supported the sale to Kinney. Jac had considered taking Elektra public. I felt that a public company would be such an enormous burden it would preclude a family life. And from my perspective one of the reasons for doing the Kinney deal was for us to have more time together. But then when it actually happened, that became his interest rather than the family. The day he signed, we walked out of the meeting and Jac said, "I feel like I just got married"—with absolutely no sense of what effect that remark would have had on me.
JAC: The day before signing, I called all the staff into the Elektra conference room to tell them what was happening. I spoke for about five minutes, then took questions for another forty-five.
Our staff were mostly liberal-leaning people who abhorred the word "conglomerate," which had come to mean mindless acquisition for financial manipulation where nothing fit. They had lived in such a protected cocoon that any thought of outside scrutiny overrode common sense. I tried to assure them that we had a plan.
I called the key artists personally and most caught my enthusiasm, or at least said they did. I then had Pearl mail special letters we had prepared in advance to all artists, managers, and attorneys informing them of the arrangement and that it would be business as usual, only better.
The women on the staff—with the exception of Tracey Sterne—were more willing than the men to be accepting. Mel Posner and Steve Harris were both enthusiastic. Steve just thought the idea made sense. Mel grasped the benefits in distribution and improved marketing. Jack Reinstein was pissed that I hadn't brought him into the negotiations, but with Irwin by my side that wasn't necessary, and it would have created problems with other key staff not privy to the talks.
Bill Harvey was the most contentious. He was petrified of losing control, and distrustful of the guarantee of autonomy that had been so willingly given by Steve Ross. Finally I just said, "Bill, it's a done deal, and I have watched out for you and the other key people. I will be dividing $1,000,000, pre-tax, among those who have the phantom stock options and were required to tender their "shares," and you, Mel Posner, Russ Miller, and the others who have served." I made out thirty-two checks in all. The largest went to those with the longest service, who had made the biggest contribution. Bill and Mel each received between $75,000 and $100,000, and I gave Mel a sapphire Cartier watch in warm recognition of his years of service and the affection in which I held him.
When the word got out about this million-dollar distribution—the fact of it and the size of it—I was regarded by some in the business as a saint, by others as a holy fool, and by most entertainment-business lawyers as just plain crazy.
