In the End, MCA Deal Was Simply a Matter of Trust

In Hollywood, deals are often made and broken based solely on trust.

Sunday’s sale of MCA Inc. by Matsushita Electric Industrial Co. stemmed from an intense distrust that had brewed for more than two years between the Japanese owners and American managers.

Seagram Co.’s ability to move fast, tie up Matsushita in exclusive negotiations and gain control of MCA reflects the extraordinary trust that developed in just a few weeks between Seagram Chief Executive Edgar Bronfman Jr., 39, and Matsushita President Yoichi Morishita, 61.

According to half a dozen key sources interviewed by The Times, these relationships of trust and distrust were the crucial backdrop to six months of maneuvering and negotiations spanning 10 time zones that led to the selling of one of Hollywood’s major entertainment companies Sunday.

The stage for the sale of MCA was set last fall.

Senior officials from Matsushita planned a secret meeting with MCA’s top executives--Chairman Lew R. Wasserman and President Sidney J. Sheinberg--at the posh Halekulani Hotel on Waikiki Beach in Hawaii to try to sooth worsening relations.

When news leaks divulged the site of the Oct. 18 meeting, the locale was quickly switched to the Mark Hopkins Hotel on San Francisco’s Nob Hill in hopes that details of one of the most scrutinized corporate family squabbles could be kept private. Press reports suggested that Wasserman and Sheinberg might propose a buyback of the company they had sold to the Japanese in 1990.

The issue of ownership was never broached. But the issue of control was central to the meeting, which was chaired by Morishita. Wasserman and Sheinberg expressed a strong desire to expand MCA globally through various acquisitions and reinvestments to stay competitive with such rivals as Time Warner and Rupert Murdoch’s News Corps.

The San Francisco meeting was the culmination of tensions that had been brewing since Matsushita bought MCA with the idea of seamlessly blending its “hardware” electronics business with one of Hollywood’s premier “software” companies that makes and distributes movies, TV shows and music.

Wasserman and Sheinberg issued an ultimatum, telling Morishita that if they couldn’t build the company as they saw fit, they would leave when their contracts expire at the end of 1995. The meeting ended acrimoniously, with both MCA and Matsushita officials leaving frustrated.

For MCA, the meeting crystallized what it had come to realize for several years--that Matsushita would not be the deep pockets the company hoped for to expand and keep up with such media giants as Time Warner, owner of Warner Bros. Studios; Rupert Murdoch’s News Corp., owner of 20th Century Fox, and Viacom Inc., which earlier in the year had bought Paramount Communications.

In 1992 MCA was forced to drop out early in the bidding for Virgin Records--home to the Rolling Stones and Janet Jackson--when British entrepreneur Richard Branson put the company up for sale. Last week, an MCA source told The Times that the entertainment company wanted to make a $600-million offer for Virgin, an acquisition it saw as crucial to strengthen its music business overseas, “and they (Matsushita) wouldn’t give us the right to make it.”

In the end, Virgin went for a whopping $973 million to Great Britain’s Thorn EMI, far more than MCA executives would have ever paid. But the bruised feelings remained.

“The point is, they wouldn’t even allow us to get into the bidding,” the source said.

On Sept. 17, Wasserman and Sheinberg flew to Matsushita’s hometown of Osaka to discuss a possible bid for CBS with ITT Corp. Because MCA was foreign-owned, the company would be only a 25% partner. Still, it would give MCA access to an important distribution outlet for its shows at a time when competition for such channels is intense.

The meeting started off badly, with Morishita keeping the executives waiting for two hours, said a source close to the negotiations. Matsushita nixed the proposal.

According to one source, Sheinberg wrote an angry letter to Matsushita Chairman Masaharu Matsushita protesting how badly he and Wasserman had been treated and personally criticizing Morishita. “The letter written by Sheinberg was very disrespectful and was a slap in their face,” said a source close to Matsushita, adding “that started everything rolling.”

At MCA’s headquarters in University City, meanwhile, executives were equally angered at the treatment of Wasserman, 82, probably the most revered executive in Hollywood.

Some inside MCA believe that if the two top Matsushita executives who were instrumental in the MCA buyout--then-President Akio Tanii and then-Executive Vice President Masahiko Hirata--had not left the company, the sale would not have occurred. The executives, who were more in tune with Sheinberg and Wasserman, had left amid corporate scandal and declining sales.

MCA also was overruled by Matsushita in the way it wanted to structure a deal for the $1.5-billion Universal Studios Japan, which is now being built in Osaka and is expected to be completed in 1999.

“There was a history of growing frustration,” an MCA insider said. “When the answer kept coming back ‘no’ to all the suggestions like ‘let us access the public markets, let us orchestrate a sale, let’s bring in a partner . . . it was clear things were really over.”

Another factor affecting MCA’s future was the sea change in the Japanese economy, which after booming in the 1980s fell on hard times. There simply wasn’t money available to expand, sources say.

By the end of the failed October meeting, a source close to Matsushita said the Japanese company was clearly at a loss about how to respond to the MCA bosses’ ultimatum.

Pressure to decide what to do about Wasserman and Sheinberg increased with the announcement in October of the formation of DreamWorks SKG by two of MCA’s most valuable assets--filmmaker Steven Spielberg, who made such hits as “Jurassic Park” and “Schindler’s List”--and music mogul David Geffen, who sold his highly profitable record label to MCA in 1989. The two formed DreamWorks with former Disney Studios chairman Jeffrey Katzenberg.

An alliance with DreamWorks would be a lucrative deal for MCA, which would distribute the company’s movies overseas as well as its music and television programs. Many in Hollywood believe that MCA managers used DreamWorks as a bargaining chip to pressure Matsushita into giving them the control they wanted. The public threat was made by members of the Dream Team that if Sheinberg, Spielberg’s mentor, left MCA, any hopes of an alliance between MCA and DreamWorks would be dashed.

After the San Francisco meeting, Matsushita called upon Creative Artists Agency’s Michael Ovitz and Wall Street entertainment investment banker Herbert Allen, of Allen & Co., both of whom helped broker the 1990 MCA sale to Matsushita, for advice. Ovitz and a team of CAA executives flew to Osaka in the second week of November to talk with Matsushita executives, who pointedly asked if the problems could be resolved at all.

By December, it became clear to Matsushita advisers that MCA might be sold. Allen & Co. and the Wall Street investment bank Goldman Sachs were asked to appraise the entertainment giant.

In January, Ovitz and a team of six CAA executives flew to Osaka for an eight-hour meeting with Matsushita’s entire senior management, including Morishita. The CAA team made a four-hour, bilingual presentation to Matsushita officials explaining their options and potential strategic alliances. One option: Sell the company. Ovitz left Japan a day before the devastating Jan. 16 earthquake in nearby Kobe.

Later in January, a lower-level Matsushita executive talked casually by telephone with Seagram Chief Financial Officer Stephen Banner, who as a mergers lawyer on Wall Street had worked on the original Matsushita acquisition of MCA. Banner indicated that Bronfman might be interested in buying MCA, broaching for the first time Seagram’s interest in the company. For the next month, Seagram executives debated the possible acquisition internally.

On March 6, Bronfman met in Osaka with Morishita for the first time. It was a get-acquainted session to see what each side wanted. At that meeting, the two sides decided to negotiate exclusively for a possible sale, Bronfman said in an interview with The Times on Sunday.

For Seagram, sources said, an exclusive negotiation would prevent MCA from turning into an auction. For Matsushita, it would spare the company public embarrassment if the deal fell through.

Even so, other potential suitors had started to surface as early as January, including European entertainment giant PolyGram, News Corp.’s Murdoch and German media conglomerate Bertelsmann.

About two weeks ago, Bronfman made a second critical trip to Osaka, at which time he made a firm proposal. The two sides left with no deal, but a clear understanding of where each stood in relation to the value of MCA and how a sale might be structured.

They agreed to continue negotiating exclusively, turning over the talks to hired experts, the lawyers and bankers.

One delay occurred because both sides shared investment bankers Allen & Co. and Goldman, Sachs & Co., and also both used the law firm Simpson Thacher & Bartlett. Ovitz also had advised both companies in the past.

Seagram hired new lawyers and bankers, retaining Shearman & Sterling as a law firm as well as CS First Boston as an investment bank.

“While there was no assurance that the gaps could be bridged, there was extraordinary trust and respect,” said one Wall Street executive familiar with the deal. “The trust between Bronfman and a man running a $65-billion-a-year company who doesn’t speak English was quite remarkable. This was a transaction built by two people who trusted each other.”

The relationship between Matsushita managers and MCA brass continued to deteriorate. A specific part of the negotiating agreement was that all talks were to be kept confidential, including from Wasserman and Sheinberg. Both men were angered by being shut out, and Sheinberg publicly lashed out at Matsushita after the deal surfaced in the press before they had been formally notified.

On March 30, Ovitz flew to New York to join in what were increasingly intense negotiations. When he left on April 1, the lawyers began drafting documents. The deal was hammered out over 10 days in round-the-clock meetings.

Meanwhile, Ovitz went to the Bahamas on a family vacation along with CAA President Ron Meyer and his family. There, he ducked calls all week from the press and Hollywood executives eager to know what was happening, but worked the phones from a yacht to stay on top of the deal.

On Friday night, Bronfman and his team in New York and Morishita in Osaka agreed by telephone to the financial terms. By Saturday morning, the 2-inch-thick contract had been produced.

At 3 p.m. Sunday, Bronfman, Ovitz, Allen, Morishita and about a dozen lawyers, bankers and others met formally on the 21st floor of the Citicorp Center building in Downtown Los Angeles at the offices of Shearman & Sterling. Earlier in the day, Morishita had paid a personal visit to Wasserman’s home.

At 3:30 p.m. Bronfman, accompanied by his father, Edgar M. Bronfman, who had handed him the reins a year earlier, formally signed to buy 80% of MCA for $5.7 billion. Bronfman senior, 65, who was chairman of Metro-Goldwyn-Mayer “for a minute and a half” after he made an investment in that movie studio in the 1960s, said he blessed his son’s move “totally.”

After a round of press interviews explaining why he had spent a fortune to buy one of Hollywood’s six major studios, Bronfman, his father and other parties to the deal went to the Biltmore Hotel for a celebratory dinner.

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The Road to MCA’s Sale

The key events leading to the sale of MCA, one of Hollywood’s top entertainment companies, took place over several years:

* 1992: MCA executives are prevented by parent Matsushita Electric Industrial from staying in the bidding contest for Virgin Records, eventually sold to Thorn EMI.

* September, 1994: MCA plan to join with ITT Corp. on a possible bid for CBS television network is rebuffed.

* Oct. 18, 1994: Meetings at the Mark Hopkins Hotel in San Francisco between Matsushita President Yoichi Morishita and MCA Chairman Lew R. Wasserman and President Sidney J. Sheinberg over whether MCA would be able to expand end in frustration.

* January, 1995: Seagram Chief Financial Officer Stephen Banner, who as a mergers lawyer on Wall Street worked on the original Matsushita acquisition of MCA, raises the possibility--in a casual phone conversation with a lower-level Matsushita official--of Seagram making a deal for MCA.

* March 6, 1995: Seagram Chief Executive Edgar Bronfman Jr. meets with Morishita in Osaka.

* Friday: The two sides reach a tentative agreement for Seagram to buy 80% of MCA for $5.7 billion.

* Sunday: Agreement signed in Los Angeles.