Sony And A Nightmare Called Columbia

It wasnt really fair, Walter Yetnikoff said later, to throw Sonys Mickey Schulhof into a negotiation with Herbert Allen. Not that Schulhof wasnt impressive in many ways. He had a Ph.D in physics from

Brandeis University. He could fly planes. He shared with his boss, Norio Ohga, not only an interest in aeroplanes but in art and ham radio. Ovitz found him polished and graceful. A massive wall closet in his office at Sony head-quarters in New York contained a showcase of high-tech toys: laser discs and compact disc players.

But when it came to negotiating the purchase of Columbia, Yetnikoff and many others were sure that Schulhof was no match for Herbert Allen. To have Mickey Schulhof against Herbert Allen is almost a crime, Yetnikoff says. Herbie Allen and Mickey. This is not fair. This is like putting my Labrador retriever thunder against a Chihuahua. This is stupid.

 

By now, Allen was a powerful fixture in the entertainment communitya link between Wall Street and Hollywood. The annual summer conference that he hosted in Sun Valley, Idaho, was a place where communications moguls, money men, and financial players met to talk business at morning seminars, and to talk more business as they played golf and tennis in the afternoon. While the suspicion that Columbia had been gussying itself up for a sale had become widespread by the middle of 1989, some wondered whether Allen would be willing to part with the studio after seventeen years. His friends doubted that he would suffer many pangs. If an offer was received acceptable to Coke and advantageous to the other shareholders, he would sell in an instant, said John Heyman, a British film financier and a friend of Allens at the time.

Schulhofs mother was German and his father was Gzech. They had fled the Nazis and settled in a small apartment in the Bronx. His father, Rudolph, started a business that would become the countrys largest publisher of Catholic greeting cards and Mass folders. By the late 1940s, he had moved the family to an exclusive Long Island suburb. Mickey was a reserved child, according to his brother Thomas, preferring ham radio to sports. He grew up imbibing conversation about business and the arts. His parents assembled an extraordinary art collection that included Cy Twombly, Alexander Calder, and Ellsworth Kelly. Rudolph became a trustee of the Guggenheim, and his wife, Hannelore, became a trustee of the Brooklyn Museum. She played the violin in the Great Neck Orchestra, and insisted that her children visit museums and attend symphonies. Mickey was sent to learn French in Geneva and Tours.

Mickeys two younger brothers went into the family business, but Mickey pursued his interest in science, doing research for a time at Brookhaven National Laboratory. During his relatively brief academic career, he published twenty-seven papers. But he always intended to meld his interest in science with a career in business.

In the early seventies, Rudolph and Hannelore were vacationing at Round Hill in Jamaica where they met and dined with Clive Davis, then president of CBS Records. The connection led to a job for Mickey, who was hired as an assistant to the vice president of operations. (At the time, Walter Yetnikoff was still working his way up the CBS Records ladder.)

A couple of years later, Schulhof told Davis that he was ready to move on to a company where his background in physics might be an asset. Davis introduced him to Harvey Schein, then president of Sony USA. Schein hired him as his assistant and Schulhof advanced quickly. By 1975, Sony had made him a vice president - the youngest to hold that title in the American operation.

At one point, Norio Ohga learned of Schulhofs interest in flying and asked him to make a recommendation about a plane for the companys use in the

United States. The two men began to bond.

In 1979, one of Schulhofs younger brothers was killed in a mid-air collision in a chartered plane. Mickeys father asked him to help with the familys greeting card business. Sony founder Akio Morita showed patience and tenacityjust as he had done when the young Norio Ohga insisted on pursuing his singing career before settling down with the company. Look, Im the eldest son also, he told Schulhof. In Japan, we have obligations, too. You go and help the family business as much as you want, but I wont let you leave Sony. So Sony installed a telephone line at the family firm and Schulhof worked there, remaining Sony employee, for four years.

Schulhof returned to the Sony offices and joined the board of the CBS/Sony joint record venture that Walter Yetnikoff had helped set up in 1967. So when Yetnikoff wanted Sony to buy CBS Records, he naturally broached the idea first with Schulhof. When that deal was made, Mickey was drawn into Sonys foray into the entertainment world.

Not everyone at Sony loved Mickey. Some in Tokyo distrusted him. Some were jealous of his influence and some resented the idea that Sony was beginning to gamble on Hollywood. These guys (in Japan) tilled the fields in the hardware business a long time to earn capital as a manufacturing company, said a source associated with Sony. Now, do they want to put that capital at risk on the movies? but those forces were overruled. Now Sonys choice had come down to Columbia, and that meant Herbert Allen.

Of course, Schulhof wasnt dealing with Allen alone - at least, not at first. He had his well-paid advisers, including Michael Ovitz. And on Wall Street, he had the Blackstone Group, an investment banking firm that had seen Sony through its acquisition of CBS Records as well as the failed MGM/UA talks.

Blackstones chairman was Peter G. Peterson, a former Secretary of Commerce during the Nixon administration and a former chairman of Lehman Brothers. Blackstone was small, but Petersons connections helped it snag some high-profile clients. He was particularly admired in Japan, where his role as chairman of the Council on Foreign

Relations gave him prestige.

He was close to Sony chairman Akio Morita.

Peterson, however successful and connected, had a way of getting on some peoples nerves. Many of his colleagues respected him but didnt much like him. He treated them autocratically, summoning them to his office unexpectedly and requiring them to wait outside for long periods. After he had founded Blackstone, Barrons dubbed Peterson the Cadillac Cassandra because he berated the public for over consumption while living a jet-setters life in Manhattan. The Peterson who rebukes us for our dependence on foreign creditors is the same Peterson who cashes a fresh $100 million check from a Japanese securities firm bent on snatching up American goodies, Barrons wrote.

The thing with Pete is that hes not an intellectual, economist Arthur Laffer said. He doesnt have a commitment to ideas. The ideas are a vehicle to make him rich and famous.

But Sony only had reason to feel good about Peterson and Blackstone. The acquisition of CBS Records had gone well. It was natural to turn to Blackstone again about its purchase of a studio. But there was a problem: Blackstone would be dealing in the entirely unfamiliar and financially idiosyncratic world of Hollywood.

Setting a value on Columbia required some sophisticated analysis and some educated guesswork. What was the value of projects in the works? Would Flatliners, a movie about medical students doing life-after-death experiments, be dead on arrival or would it earn millions? Kevin Costner in a picture called Revenge - wouldnt that be a sure bet? Would a television show that the critics liked, the Famous Teddy Z, survive? That was where Ovitz came in. He and his associates at Creative Artists Agency were assigned the task of educating the Blackstone delegation, helping them appraise the studio and projects in the works. They had performed the same role when Sony was considering the purchase of MGM/UA. It was Blackstones job to put the pieces together and come up with affair price.

Nothing was going to happen fast. In the early stages of the discussion, Sony and Coke were miles apart, with Sony starting off in the low 20s per share. Allen, acting as Coca-Colas representative in the matter, was asking for as much as $35. And he gave Sonys advisers the impression that he would walk away if his price was not met. On-again, off-again discussions dragged on for a year. To the Columbia side, it seemed agonisingly protracted. But the Japanese were daunted by the high price mentioned by Allen. There was no basis for realistic dialogue, says a source familiar with Sonys thinking.

And unbeknownst to the Columbia side, negotiations stalled because Norio Ohga had a serious heart condition. Every time we would build to making on offer, (Ohga) would get sick that insider said. We couldnt move without him. Ohga had at least one and possibly two serious heart attacks during the year when the talks took place.One of them occurred while he was in Germany; this episode was not disclosed to the public, as would be customary in the United States. An associate said Ohga later confided that he had made up his mind to proceed with the Columbia purchase as he was being wheeled out of intensive care. Another Sony source says Morita also had major surgery that was never disclosed.

In July 1989, at a meeting of the international Sony board in Cologne, Morita and Ohga approved the concept of buying Columbia if Schulhof could find a manger to run it. Sony had made a practice of installing American managers to run American operations. The company wisely assumed that it was especially important to put a native in charge of an American entertainment company.

A lot of cooks were working on this project, and all of them wanted to see a deal happen. Peterson knew that this was his clients objective, and Blackstones multi-million-dollar fee was dependent on a consummation of the courtship. Yetnikoffs goal was to become Steve Ross. And Schulhof, perhaps, was already tempted by the possibility of supplanting Yetnikoff as the head of Sonys growing entertainment business.

Then there was Michael Ovitz. Making this deal happen would be a watershed for him and for Creative Artists Agency. It would prove that Ovitz could broker a multi-billion-dollar transaction in an international arena. So the sale in itself was worthwhile to Ovitz. But his interests hardly ended there.

If Sony bought Columbia, Ovitz would seek to ensure, at the very least, that whoever ran the studio would be amenable to buying his agencys talent. Everyone in Hollywood had to do business with CAA, but some were more enthusiastic about it than others. Better to have a hearty customer like Warner than another frugal Disney, which tried to circumvent CAAs rich deals as often as possible.

And may be there would be even more in it for Ovitz. As Sony shopped for a studio, its executives began to respect and trust him. He had no experience as a studio executive, but Ovitz exuded an aura of such competence that most people simply assumed he could do the job. As the negotiations wore on, Sony reached the same conclusion.

Obits hired Robert Greenhill of Morgan Stanley to represent him in the negotiations. The matter had to be kept absolutely secret. If word got out in Hollywood that Ovitz was considering a move, his position would be damaged. The stars from whom he derived his power might get nervous that he wasnt fully committed to them. His associates at CAA might start jostling for power. So Ovitz had to keep things quiet or deal with some unpleasant consequences if the negotiations didnt pay off.

In some ways, Ovitzs interest in the job seemed a bit out of character. He occupied an almost mystical place in Hollywood. why would he want to run Columbia and Tristar when it seemed that he already had de facto control over almost all the studios? If the deal was sweet enough, however, it would make sense. Ovitz was a titanic success at CAA and he was emerging as a deal maker, but he was still an agent living off a percentage of fees paid to the talent. Talent could be fickle. And without a change, Ovitz could not launch himself into the financial stratosphere like Michael Eisner, the chairman of Disney, or the envied Steve Rossel.

Greenhill and Ovitz made their presentation to Sony. The Japanese were stunned by its dimensions. For Ovitz, nothing would do but the deal of deals - a deal that reflected Ovitzs position in Hollywood. He would ask for everything: huge compensation, total control of the company, a significant amount of stock, an enormous acquisition fund to buy new businesses. MCA and Paramount and Warner all had publishing divisions - why not the new Sony entertainment company? Hearing the Ovitz wish list, Sony executives felt somewhat betrayed, according to one source close to the negotiations.

As soon as it became apparent that Sony wasnt going to meet his terms, Ovitz tried to ensure that history would record that he had turned the job down. As rumours about his negotiations circulated, Ovitz steadfastly denied that he ever wanted to work for Sony. The word was that he had sought a very rich deal, but Ovitz implied that he had asked for a lot to induce Sony to drop him. Asking for the moon was just a polite way of saying no, he suggested.

With Ovitz out of the picture, Schulhof and Yetnikoff became increasingly nervous about finding competent management. At one point, Schulhof even asked Herbert Allen to advise him about possible candidates. Allen said the would be willing to make suggestions but warned him that he represented Columbias interests, not Sonys,.

Finding someone with the brains, guts, and instincts to run a studio has always been difficult. The job calls for an individual who can make constant decisions involving hundreds of millions of dollars. Business sense isnt enough; a studio chief needs to have some intuition about what will entertain the fickle public and some rapport with temperamental actors and directors. Indecision is intolerable: The distribution system is a gaping maw that needs to be filled with one picture after another. Aside from movies, there are television operations, home video, theatres. Overhead roars along at more than $ 100 million a year. Failures are public.

Those few who have demonstrated an ability to achieve consistent success are jealously guarded by their employers and given handsome long-term contracts. The A-list playersBob Dally and Terry Semel at Warner; Jeff Katzenberg, then at Disney- werent likely to jump ship, especially considering the stigma involved in going to work for the first Japanese owner of a Hollywood studio.

Sony was faced with a daunting challenge. But before its management problem could be solved, Walter Yenikoff was sidelined. His doctor warned him that his substance-abuse problems were going to kill him soon. On August 13, 1989, the Sony jet delivered Yetnikoff to the Hazelden clinic in Minesota.

Mickey Schulhof was left to press ahead with the search. He tried to communicate with Walter, who was living in a barracks like setting with one pay phone in the hall of his dormitory. I had crotch rot, Yetnikoff remembers. I was dripping from my nose. I had high blood pressure. Im on the verge of dying. And theyre calling me on the pay phone. The unit has 120 guys. You can imagine in rehab, people have some problems. And theyre calling me: Whos going to run the company?,

When he got Walter on the phone, Mickey said he planned to proceed with the purchase of Columbia even though the management issue still wasnt resolved. Yetnikoff wasnt happy to hear it. He also was undergoing a metamorphosis in rehab. Two or three weeks into it, he went spiritual, says one of Sonys advisers. The man became a monk. He got so ethereal, so philosophical. It was a bad movie.

Yetinkoff emerged from rehab after a months stay, on Sunday, September 10. It was a pristine day and he was a changed man, infused with gratitude for the green grass and the shining sun. Still, there was business to be done. Sony was moving toward losing a deal to buy Columbia and there was no management in place. Usually, Hazeldens graduates are advised not to dive back into their old lives, but Walter showed up at the office the next day. The first thing he did was command his staff to join hands and recite a prayer.

Schulhof hadnt committed himself to hiring anyone, but he thought he had a candidate from a short list provided by Ovitz. It was Frank Price, the man who ran Columbia in the early eighties and made a slew of prestige hits, but not a great deal of profit. In some ways, Price was eminently presentable. He had been at the helm of Columbia before, and he had run Universal. He could claim credit for Tootsie, Out of Africa, Ghostbusters. Though he had grown up poor in the Depression, his family moving from city to city as his father looked for work, Price had made himself into an urbane, attractive executive, a carefully groomed man who looked good in a board room. Frank is a self-created invention, marvelled one former Columbia executive. You would think he grew up as a privileged child. Going to Choate.

But Price had been fired from Columbia and then from Universal. The complaint was always the same: He was too slow and he didnt communicate. He lost the willingness to make movies and he would not talk to his boss, says one high-level Universal executive.

After Price left his studio job, his old friends at Columbia gave him an exceptionally rich production deal with autonomy and power to make up to six films a year. But after three years, he had failed to put a single picture into production. Price maintained that the strike by the Writers Guild had hampered him. And he was fastidious about the projects he wanted to make, working and reworking them. An executive who worked at Prices company remembers how his excitement ebbed as projects failed to materialise. Every day we met and talked about things we had read. For a while, it was very exciting because you wanted to believe you were onto something that the rest of the community just didnt understand, he says. You develop (material) intelligently - slowly, but intelligently - and eventually you would recap extraordinary rewards. But as the months went by, as we seemed to be at a stage where things really werent moving forward, it became problematic to conduct business with agents. Finally, the executive remembers, paralysis set in.

Price had done Ovitz some well-timed favours in the past. Many executives and agents thought he had helped Ovitz on a couple of occasions by getting individuals out of Ovitzs way. One was Guy MacElwaine, the affable former agent who had succeeded Price at Columbia. When Coke fired him from his studio job, the rumour mill held that MacElwaine was going to become an agent again. Many in Hollywood believed that Ovitz wanted to avoid the competition, since MacElwaine had been quite influential in his day.

Price, then running Universal, had handed MacElwaine a lucrative deal to give the studio an option on film he might want to produce. MCA president and chief operating officer Sid Shinberg, Prices boss, was incensed, according to sources familiar with the episode. Price disputes that he offered the deal as a favour to Ovitz. Guy had been my head of production at the time I was head of Columbia, so we worked together extremely well, he says. Therefore, a prod-uction-type arrangement with him would have been the logical thing to do.

While many in the industry had concluded that Price was not decisive enough to run a studio, Ovitz apparently had not lost faith. With Sony searching for a studio chief, he had put Price on his list of candidates. Price met with Schulhof and it is easy to imagine the two hitting it off, Schulhof relieved, perhaps, to find someone from Hollywood who seemed so polite, he would hold little appeal for Walter Yetnikoff. Walter would feel uncomfortable with a studiochairman who had such strong ties to Ovitz.

So when Schulhof took Price to lunch in Yetnikoffs office a couple of days after Walter return from Hazelden, Walter was not in a hospitable mood. Price found him volatile and easily distracted. The lunch ended unceremoniously when Yetnikoffs barber appeared. Walter donned a kimono and sat down to have his hair cut. The search for management was to continue.

It seemed that a test of wills was developing between Yetnikoff and Ovitz. As the pressure mounted, Walter decided to seek out his own candidate, someone who might not have been anyones first choice buy whom he might reasonably expect to control. The day after the lunch with Price, he phoned Peter Guber.

Jon Peters, having already heard about the brewing deal, had called Walter to remind him of their many conversations about running an empire together. They had talked about it on a cruise that they had taken together a year earlier in the Virgin Islands. Despite that prompting, Yetnikoff would later maintain that he was clear in his own mind about one thing.

When Yetnikoff had mentioned to Ovitz that he might call Guber, Ovitz responded with a warning: Jon Peters and Peter Guber had a long-standing relationship with paternalistic Warner. They had just signed an extremely favourable five-year production deal there, with the bloom of Batman still on them. If you want to speak to them, Ovitz said, you must approach Steve Ross first to enlist his support. There was reason to think Ross would go along. He had agreed, back when Jon and Peter had made their abortive offer for MGM, to let them out of their contract if the deal went through.n

Book: Hit and Run, How Jon Peters and Peter Guber Took Sony for a Ride in Hollywood

Authors: Nancy Griffin and

Kim Masters

Pages 450 Price:$ 21.50

Distributed byIBD

A lot of cooks were working on this project, and all of them wanted to see a deal happen.

These guys in Japan tilled the fields in the hardware business a long time to earn capital as a manufacturing company, said a source associated with Sony. Now, do they want to put that capital at risk on the movies.