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Companies: Coup at the Top

11 minute read
George J. Church

The arrangement was supposed to be cut and dried, even ironclad. Not only did it designate Nicholas J. Nicholas Jr. the sole heir to Steve Ross as head of Time Warner Inc. The 1989 merger agreement that created the world’s largest media company also spelled out the date of his accession — five years in advance. As of 1994, Ross, while remaining chairman, would step aside as co- chief executive officer, and president Nicholas would become the sole CEO.

Except that it didn’t work out that way. Last week, with two years to go before his accession, Nicholas, 52, found himself outside the company, dropped abruptly. Into his shoes stepped Gerald Levin (pronounced Le-vin, the second syllable rhyming with win), 52, an old rival who was bounced as a Time Inc. director in 1987 — a move said to have been engineered by Nicholas — but recovered to become the Time side’s chief idea man and a main drafter of the merger plan.

Officially, Nicholas resigned, citing unspecified “differences” with management and the board of directors. In fact, he was ousted in a coup conducted, he angrily told friends, in banana-republic fashion. Exactly who played what role in fomenting it was uncertain. But from Wall Street to Hollywood to Tokyo, theories abounded.

According to one line of speculation, the timing of the Nicholas ouster was dictated by Ross’s health; he has been undergoing chemotherapy treatments for prostate cancer since last autumn. Directors and company officers who opposed Nicholas felt that they needed to ensure that if Ross died, Nicholas would not succeed him. But a number of other insiders say the move would have been made months earlier had it not been for Ross’s illness. One crystallizing factor, apparently, was the death of Borg-Warner chairman James F. Bere, a longtime member of the Time Inc. board who remained a director after the merger. With the so-called Time faction reduced by one, this theory goes, Ross and Levin knew that they could count on support from a majority of the board.

Some accounts named Levin as the chief organizer, working with the support of J. Richard Munro, a former Time Inc. CEO who retired in 1990, shortly after the merger with Warner Communications. But it was clear that chairman Ross, 64, though weakened by his cancer therapy, had nonetheless taken a major hand.

While the shift had been brewing for months, it was consummated in just four days. On Sunday, Feb. 16, board members got the first calls summoning them to a special meeting in New York City. On Thursday, they voted 21 to 1 to bounce Nicholas, who had pointedly declined to attend. Rejecting an offer of a company plane that would pick him up in Vail, Colo., Nicholas chose instead to continue a family skiing vacation and sent his so-called resignation to New York.

Predictably, there was some immediate speculation from outsiders that the Nicholas ouster marked a final victory for the supposedly freewheeling Hollywood Warner Communications crowd over the reputedly more restrained, ! button-down old Time Inc. clique. “You have this group of Warner rowdies storming the gates of Rome,” says a management consultant. “Just like the Visigoths made quick work of the Romans, the Warner people are quickly dispatching the remnants of the old Time.”

That view seems to be at best a crude oversimplification. Although he was a top executive of Time Inc., Nicholas was basically a financial analyst, a numbers man. Levin too came out of Time Inc., though he rose through its newer cable-television enterprise rather than the publishing operation that was the core of the company for a half-century after its founding in 1923.

It was Levin who in the early 1970s spawned the idea of renting space on a satellite to relay TV signals. A Philadelphia native who once planned to be a rabbi but switched from religion to philosophy at Haverford College, he graduated from the University of Pennsylvania Law School and practiced briefly before joining Time Inc. in 1972. His notion of bouncing movies off satellites and into living rooms from Boston to Berkeley helped transform Home Box Office from a struggling service into the biggest pay channel in the U.S.; combined with its sister Cinemax service, it now has nearly 24 million subscribers.

Levin rejoined the board in 1988 as Time Inc. vice chairman and added the title of chief operating officer of Time Warner last spring. He not only cultivated ties with Ross but also made a point of learning all he could about Warner’s movie and other entertainment operations.

A number of thoughtful observers, both inside and outside the company, feel that Levin will be more able to bridge the two cultures than the reserved Nicholas was. But they doubt that Levin will help Ross complete any takeover. “Levin is not in the Ross faction,” says Andrew Heiskell, a former chairman of Time Inc. “He’s in the Levin faction.” One Time Warner director predicts that under Levin “there’s going to be a real effort to have the Time Incers feel they’re more important and that they are players.”

Though some analysts speculated that the shake-up might ease the way for a sell-off of Time Warner’s magazine subsidiary, Levin — like Nicholas — adamantly opposes any such move. According to To the End of Time, a sharply critical book by Richard Clurman, a former TIME chief of correspondents, it was Levin who remarked at the time of the merger that “the core ((of the new company)) is not Bugs Bunny, it’s TIME magazine.” Levin is said by some to believe that sizable layoffs at the magazines last year helped demoralize their staffs unnecessarily. He is also said to feel that an emphasis on creativity is preferable to cost cutting as a focus of management.

Beyond this effort to shore up the publishing side, insiders expect Levin to make few sharp changes in Time Warner’s direction — at least not quickly. “He’ll discuss, he’ll debate,” says Michael Fuchs, chairman and CEO of Home Box Office, Levin’s corporate alma mater. “Jerry’s style is not to make dramatic moves. He’s a plodder with a lot of patience. He has the most long- term view in the company.”

Wall Street’s immediate reaction — a jump of nearly $2 a share in the company’s stock Friday — suggested a widespread belief that Time Warner had broken a damaging stalemate. The company has made considerable financial progress lately. It has reduced its burdensome debt from $11.2 billion to $8.7 billion, and in the final quarter of 1991 reported its first profit, of $45 million, since the merger. Nonetheless, many financial sources say it has been moving much more slowly than it should have been because of near paralytic tension at the top — tension between Ross and Nicholas.

In the aftermath of his overthrow, Nicholas told friends that Ross didn’t like his independence of mind. Others say the troubles stemmed largely from personality clashes between the ostensibly equal chieftains. “There are not two people more mismatched,” says a top executive. In Ross, he maintains, “you have a dreamer and a visionary, a plunger and schemer”; in Nicholas “a guy who’s small and risk averse. You could hardly get a yes out of him. He loved the status quo.” While Ross is generally described as a charmer, Nicholas “is not a likable guy,” says a director. Some executives and directors had the impression Nicholas was in over his head, knew it and had grown afraid of his job.

Specific disagreements finally brought matters to a head. Nicholas last year opposed the rights offering that raised $2.6 billion for Time Warner from stockholders who subscribed to buy additional shares; he had been shaken by the bad publicity that greeted an earlier version of the plan. Some sources say that at one point he proposed selling Time Warner’s highly profitable music division to raise cash, an idea that horrified (and no doubt further alienated) Warner executives.

Henry Luce III, son of Time co-founder Henry R. Luce and a Time Warner director, corroborates a widespread report that the “one solid issue” triggering Nicholas’ downfall was his attempt to block one of Ross’s major deals: Time Warner’s sale of a 12 1/2% share in its movie, cable-TV and Home Box Office operations to two Japanese companies, electronics maker Toshiba and C. Itoh, a trading company, for $1 billion. Luce says that while Ross wanted to bring foreign investors into operations that Time Warner would continue to control, Nicholas favored selling off assets outright.

Benjamin Holloway, an outside director of Time Warner, gives a different reason: Nicholas, he says, “was concerned about the Japanese influence in America’s communications industry. He thought that we were opening the door to something that might not be too good.” By some accounts, Nicholas’ opposition not only delayed the deal but forced it to be renegotiated — on terms less favorable to Time Warner than those originally planned; an executive says the company might have got an extra $100 million to $200 million out of the Japanese if the deal had closed quickly. Ross, says a company adviser, was so angry that for months he and Nicholas have not even been speaking to each other; Levin, arriving at work before the other two and leaving after them, carried messages between their offices on the 29th floor of the Warner building in midtown Manhattan.

Finally, says the adviser, Levin called on Munro last Sunday, at the retired chairman’s home in New Canaan, Conn., and then on other directors, to argue that Nicholas had to go. Levin, says this source, contended that “irrevocable damage had been done in the Toshiba deal, that the estrangement was incurable and that the impasse between Steve and Nick had to be broken if the company was to move forward.” Several company sources, including directors, say Levin was acting on behalf of Ross, who also took a personal hand. One director says he was called first on Sunday by Arthur Liman, a prominent lawyer who is a close friend and associate of Ross’s, and then on Monday by Ross himself. Liman, he says, told him “that certain directors ((already)) had been spoken to and were in line. It showed a background of careful preparation; it seemed that it had been going on for at least a week.”

Last Wednesday, Munro reportedly called Nicholas in Vail to break the news. Nicholas, friends say, had no idea what was coming and was bruised and very angry. He made a few calls to directors to try to round up support but found he had almost none. When the board met Thursday (Ross participated by speakerphone from his New York apartment), some members thought the action was precipitate. But only Luce spoke out openly in opposition, and he got no backers; his was the only vote against. Nicholas will be paid an estimated $15 million to fulfill the seven remaining years on his 10-year contract.

So now it is Levin who will take sole charge of the company in 1994 — or is it? “Levin is the right man for the right time,” says David Liebowitz, who watches media companies for the firm American Securities. “He’s aggressive and expansion minded, so he can keep an eye on costs and take a long-term view of the company’s future.” HBO’s Fuchs calls his predecessor “the inheritor of the Time tradition; he has the old feeling that we are more than just a business.”

Ross so far has received the first three of six chemotherapy treatments; though they have weakened him, they are also said to be bringing some progress. The chairman has told some associates he expects to be back in his office by late spring. If he recovers fully, some doubt that he will give up the chief executive’s post in 1994 in anything but name, and perhaps not even in that.

The verdict on how well Time Warner will succeed as a merged company has yet to be rendered, but a stalemate at the top certainly reduced its chances. Breaking that logjam and having in place two co-CEOs who seem capable of communicating comfortably with each other could go a long way toward improving the odds.

CHART: NOT AVAILABLE

CREDIT: TIME Graphic by Joe Lertola

CAPTION: WHAT THEY CONTROL

Time Warner’s 1991 revenues in millions and selected wholly and partly owned enterprises

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