by Connie Bruck
From the start, Ovitz set out to make Sheinberg his ally; he wanted to transform the perennial deal-breaker into this deal’s crucial facilitator. He first began talking to Sheinberg in early 1990 about the possibility of his having a buyer for MCA, and he continued to court him attentively in the following months. “At the beginning, Michael wanted to know whether it would be possible to make a deal, what would be important, how we would go about it,” Sheinberg said. “He indicated that he was representing a Japanese company, but he did not name it.” Sheinberg added that from the start he had believed it to be Matsushita. “I told him I thought a deal was possible, assuming it was one we believed was in the best interests of the employees and the shareholders. I felt that a straightforward approach was the best one, that it was really not mysterious. He said, ‘But I want to be sure that I do the right thing.’ He wanted, I think, to be sure he didn’t turn left when he should have turned right—especially with regard to Lew Wasserman.”
Sheinberg said that the Time Warner merger in 1989—which had created a behemoth, the world’s largest media entertainment company—had had a strong impact on both Wasserman and him. They had become more convinced than ever that MCA needed greater size and more financial power in the increasingly agglomerated and global world of media entertainment companies. Sheinberg did not mention any more personal concern; but he certainly knew that if Wasserman died, the company would likely be put into play, and he would not survive. Matsushita seemed to be offering the best possible outcome for Sheinberg; he would both be cashed out of his substantial stock position and—if the Matsushita executives meant what they said—assured of continuing to run MCA. Moreover, Ovitz had emphasized to Sheinberg from the start that Matsushita not only wanted management to remain in place but that the managers would retain their autonomy—far more autonomy than if they were acquired by another American company, or even a European one. Matsushita’s ignorance about the business would, in effect, be a blessing.
Several people who had conversations with Wasserman in this period said that his worry about the weakened economy also contributed to his willingness to seriously contemplate selling the company. Like Jules Stein in the seventies, Wasserman was grimly pessimistic. “Lew vividly recalled the Depression, and he really believed that it was coming,” said Kerry McCluggage, recalling lunchtime conversations with Wasserman in 1989 and 1990, when McCluggage was head of Universal TV. Wasserman’s apprehension about a depression exacerbated his sense of the company’s vulnerability. “He was very worried about the legacy of the company that he had built with Jules Stein. He was convinced that it needed to be a nine-hundred-pound gorilla—and it was only a four-hundred-pound gorilla.”
It was not until late August 1990 that Ovitz made his formal approach. He called Felix Rohatyn, of Lazard Frères, to express Matsushita’s interest in MCA. Rohatyn had been MCA’s investment banker and a member of its board since the mid-seventies. When MCA had made its bid for SeaWorld, Rohatyn had been representing the marine park company—and Wasserman decided he should hire the banker who had handed him one of his biggest losses. Over the next couple of weeks, Ovitz had a number of meetings with Sheinberg and Wasserman, at which he evaded any mention of what Matsushita might be willing to pay.
Finally, on September 19, at a meeting with Rohatyn and Sheinberg at Lazard Frères, Ovitz said that Matsushita was contemplating a price somewhere between $75 and $90 per share, and MCA decided to go forward. The stock was then trading at only $36 a share—the market had plunged after Saddam Hussein invaded Kuwait on August 2—but Rohatyn had warned Ovitz in their initial conversation that MCA would not negotiate on the basis of the present, weakened market values.
Perhaps thanks to Ovitz’s mania for secrecy, no hint of the transaction had yet become public. But on September 25, a story in the Wall Street Journal by Laura Landro and Richard Turner reported the crucial elements of the negotiations—including a price ranging from $80 to $90 a share—and cited as its source “individuals with knowledge of the talks.” Over the ensuing months, the identity of the primary source for this story was a point of sharp interest among the participants in the deal. One magazine story in February 1991, which adhered in most respects to the chronology of the transaction provided to the press by CAA’s publicist, Stephen Rivers, strongly implied that David Geffen was the source—since Geffen, loquacious with the press, owned 10 million shares of MCA stock and stood to profit mightily from the sale. However, a widely held view among many of the people involved in the deal was that it was Ovitz who had engineered the leak.
One could see why he might have done so, for the leak increased the likelihood that the deal would be made. Ovitz had seen how Sony had deliberated in a distinctly Japanese fashion before deciding to go ahead with the Columbia acquisition; ten months elapsed between Sony’s first conversations with Columbia executives and the consummation of the deal. Wasserman and Sheinberg, Ovitz knew, would never tolerate such a wait. And in mid-September, there was reportedly still discord in the upper levels of Matsushita’s management about whether to proceed with this bold move into alien territory. A participant said that Matsushita was greatly upset by the leak, because the executives felt that “it made it sound as though things were so much farther ahead than they really were.” One of the leak’s benefits, then, was to remove any illusion of open-endedness from the process, and to insure that there would be constant pressure on Matsushita to act.
Probably most significant, though, the leak also put pressure on Wasserman.
He had seemed in the last year or so, especially, to be signaling a greater readiness to make a deal, but his ability to walk away from one was never in doubt. He had always done it before. Once the story had leaked, however, MCA’s stock price ran up from $36 a share to $61, and Wasserman was well aware that if the deal fell through the price would sink back into the low 30s, perhaps even into the 20s. That would likely prompt an attack from a raider, shareholder suits—and it would mean that the responsibility for his shareholders’ loss would be his. Many believed that Wasserman’s often expressed concern for his shareholders was not platitudinous but real—a carryover, perhaps, from when the company had been closely held. Several people involved in the deal speculated that Ovitz, who had studied Wasserman for years, had made an astute calculation. One said, “He figured that the best way to insure against Lew’s walking away was to put him in a moral dilemma—to make the decision to do it so invidious to his shareholders that it would be very difficult for him.”
The leak had other, corollary benefits. It served as a political barometer. The Sony-Columbia deal had triggered criticism in Washington that had resulted in congressional hearings. Now MCA’s lobbyists could begin massaging any potentially troublesome members of Congress, so that by the time the deal was concluded there would be no real opposition. It also allowed the Matsushita executives to gauge U.S. public opinion, something to which they were very sensitive. As the Yomiuri Shimbun reported on October 6, “A manager of the Ministry of International Trade and Industry (MITI) said, ‘At present the reaction in the American press is fifty per cent favorable, thirty per cent neutral, and twenty per cent adverse.’ . . . The release of information before the agreement has . . . been a blessing.” And, finally, the price range that was reported in the Wall Street Journal—from $80 to $90 a share—was high enough that it would probably discourage other bidders.
Ovitz’s team denied responsibility for the leak. They pointed out that it could well have damaged them, in that it would predictably drive the stock price up and, also, would be so traumatic for Matsushita that the company might have backed away from the deal. It apparently was traumatic; the Mainichi Shimbun quoted one Matsushita executive as saying that news coming out during negotiations was like “being suddenly caught putting on makeup backstage.” However, after a couple of days of damage control, one person in the deal said, Ovitz persuaded the top Matsushita executives to proceed. He was remarkably well positioned to do that, inasmuch as
he had been in a meeting with the senior Matsushita executives in Japan when the faxes of the Wall Street Journal story were handed to them.
From the early days of the negotiations, MCA executives and their advisers found Ovitz’s centrality peculiar. His role—that of a kind of über-consultant who was commanding the deal team of investment bankers and lawyers—was one they had never encountered before. Even stranger, they thought, was the nonappearance of his client. One person involved in the deal recalls asking Sheinberg, only half in jest, “Sid, does he really represent these people?” And Felix Rohatyn, recalling a Matsushita request—through Ovitz—for confidential information, said he had told Sheinberg, “You’ve got to look these people in the eye. You can’t give them any information without even seeing who they are.” But that was exactly what was happening. MCA’s investment bankers compiled information and turned it over to Ovitz, who gave it to Matsushita. An MCA executive recalled a discussion with his colleagues in which they were struggling to understand the plot they were all involved in. “I said, ‘Ovitz is in the middle. All we know about what they are saying is what he tells us, and all they know about what we are saying is what he tells them—and he may be telling both of us things that the other has never said.’ ”
For Ovitz, the matchmaker, there was an advantage in keeping the parties apart that went beyond the control of information. Had the Matsushita and MCA executives met and talked to one another at length, they would surely have realized that they were separated by a cultural gulf that dwarfed the one that existed between Sony and Columbia. Sony, which was founded after the Second World War and based in Tokyo, was the most cosmopolitan and Western of all Japanese companies. Nonetheless, it only gradually ventured into the world of American entertainment—participating in an extremely lucrative joint venture with CBS Records for nearly twenty years before buying that company in 1987, and then, in 1989, acquiring Columbia Pictures. Matsushita, based not in Tokyo but in the more hidebound, old-money city of Osaka, was a conservative company, steeped in the philosophy of its legendary founder, Konosuke Matsushita, who is worshipped by Japanese workers as “the god of business management.” He started the company in 1918, and eventually became messianic about his goal: providing as many electric fans, light bulbs, radios, and other household appliances as possible at as low a price as possible, not only to make a profit but also to achieve a social good. Konosuke Matsushita’s philosophy has since been codified into a company creed and in the Seven Spirits of Matsushita, which are generally recited at morning assemblies, and “spiritual training” (a study of that philosophy) is a part of the corporate regimen. While Sony put a heavy premium on creativity and cultivated an environment that encourages a degree of outspokenness unusual in a Japanese company, Matsushita favored homogeneity, and its executives were known for their modesty. (“The higher you climb in the hierarchy, the more modest you become,” a middle-level Matsushita executive once told the writer James Lardner.)
Ovitz was anxious about the chemistry between the Matsushita and MCA executives—Sheinberg, in particular. An aficionado of Oriental culture, Ovitz felt that he had a rapport with his Japanese clients, and could project what their reactions to a person or situation might be. He had found certain passages in Edwin O. Reischauer’s 1988 book The Japanese Today particularly relevant in preparing for this transaction. In one passage, Reischauer describes the difference between Western and Japanese personality types. The Japanese type is “at least superficially smooth, affable, mild, and formally correct,” he writes. “Westerners seem to them by contrast a little rough, unpredictable, and immature in their frankness and ready display of emotions. In the West unpredictability in a person may be seen as amusing or spirited, but to the Japanese it is a particularly reprehensible trait.” Reischauer seemed to have been writing with Sheinberg in mind. One person involved in the transaction said, “There were egos to be handled here—and there was nothing to be gained from putting them together, except for that one time. There’s no rushing Matsushita Electric Industrial—no rushing a company that is that old and that rich. And there’s no telling Lew and Sid how to run their company. You want to control the two sides, control how you put them together—you have to immerse them slowly in the bathwater. It’s like sculpting—you need a base to work from, then you can knead and play with it. But if it is thrown together too quickly it could have an ugly face.”
Some of the principals finally met on October 7, at a dinner at Wasserman’s home—and even then it was not Matsushita’s president, Akio Tanii, but its executive vice president, Masahiko Hirata, and its senior managing director, Keiya Toyonaga, who attended. When Ovitz introduced Hirata to Sheinberg, Sheinberg told Hirata, “You probably don’t know this, but I am responsible, in part, for your VHS system’s having become as successful as it did.” Sheinberg was referring to the bruising battle Sony and Matsushita had fought in the late seventies over their competing videocassette recorder systems. Initially, Matsushita’s VHS system, introduced after Sony’s Betamax, had captured the market by underselling the Betamax. Then, with the rise of the prerecorded movie cassette, the VHS victory became self-sustaining; more video stores carried VHS cassettes than carried Betamax because there were more VHS machines on the market; and because there were more VHS cassettes available, more people bought VHS machines.
Just how Sheinberg came into this scenario was not immediately apparent, but he went on to explain. An extremely litigious person, Sheinberg had been the progenitor of a lawsuit (he often referred to it, in fact, as “my personal lawsuit”) that Universal and Walt Disney Productions filed against Sony in 1976, in which they sought to block Sony’s sales of the Betamax—arguing that the machines, which were used to record movies and programs from television sets, violated copyright law. Ultimately, Universal and Disney lost their battle in the United States Supreme Court in 1984. The litigation, moreover, appears to have been not only quixotic but—insofar as it was prompted by a fear that the VCR would hurt the entertainment industry—profoundly wrongheaded. (And reminiscent, too, of the moguls’ fear of television—a fear that Wasserman, of course, had not shared, and which in later years he gently ridiculed.) One ancillary effect of the lawsuit was to make it more difficult for Sony to license, for prerecorded cassettes, movies from most major Hollywood studios—a handicap that had then fired Sony’s desire to own software. The slowdown of Sony, Sheinberg claimed, had worked to the advantage of VHS, the late starter.
After Sheinberg finished describing at some length his inadvertent contribution to Matsushita in the hard-fought Betamax-VHS battle—a battle that had been crucial to Hirata, who was heavily involved in the development of the VHS—Hirata responded by shaking Sheinberg’s hand and saying, simply, “Thank you.”
About six weeks later, the parties met again, this time to negotiate their deal. They gathered with their advisers for dinner at New York’s Plaza Athénée hotel, in the rococo-style restaurant, La Régence, and Wasserman rose to toast his companions and welcome the Japanese. Then, referring to the process they would all be embarking on the next morning, he declared, “We’ve come here to make a deal. If we do, that’s fine—and if we don’t, that’s fine, too.”
Whether he had been in the role of buyer or seller, it had always been his stance. It had, of course, provided him a psychological advantage vis-à-vis his opponent. But it had not just been tactical posturing—Wasserman had demonstrated his professed equanimity by walking away from many deals over the course of what he liked to refer to as his “long and checkered career.” And doing so had become a signal trait, a kind of assertion of his preeminence—it somehow seemed demeaning to him to betray eagerness for a deal, or to return to a negotiating table, or to make a higher bid after an offer had been rejected. In the role he had painstakingly crafted for himself, he had decided that such behavior was beneath him. One of his lawyers attending this dinner said later, “For fifty-nine years, Lew Wasserman has been doing deals, and he doesn’t ever show his cards. I have
been in many sessions with Lew where he stands up, politely says goodbye, and the other side never sees him again.” So Wasserman’s words served to remind everyone at this long, formal dining table of the possibility—even the likelihood—that he might do that again.
Such an outcome seemed almost preordained when the negotiations began the next day. Two months earlier, Ovitz had spoken to Rohatyn and Sheinberg of a price range of $75 to $90. Now, he announced that Matsushita was prepared to pay $60 a share in cash, plus an equity stake worth about $3 a share in WWOR, the MCA-owned television station that was to be spun off to shareholders. (United States laws forbids majority foreign ownership of a broadcast property.) Seeking to explain the dramatic discrepancy, Ovitz pointed to changed world conditions—an increasing likelihood of war in the Persian Gulf, a weakening economy. And in private conversations with Sheinberg he swore that he had learned the amount of Matsushita’s offer only an hour before he presented it, and that he had exhorted the company to offer $65 a share instead.
