About.Face
forbes.com
David Simons, Forbes.com, 01.03.02, 12:30 PM ET
NEW YORK - Last year, dozens of dot-com chief executives flamed out along with their stock options and their companies. Scott Kurnit, CEO and co-founder of community site About.com, saw it coming. CEO Tom Rogers of magazine publisher Primedia didn't, despite bright red risk-averse signals from Kurnit.
In October 2000, Kurnit negotiated the sale of About to Primedia (nyse: PRM - news - people) for $690 million in stock--a 50% premium to About's market value. By last August, Primedia stock had tumbled 60%. But Kurnit had arranged for Primedia to guarantee $25 million of the $68 million paper value of his acquisition take, for a year after the deal closing date. By August, Kurnit had sold the guaranteed shares for $10 million, with Primedia obliged to make up the $15 million shortfall.
Kurnit also negotiated his 2.6 million Primedia stock options, to be exercisable at 30% of the value of Primedia stock on the closing date. By then, three months later, Primedia shares had declined 37% from the $15.25 when the deal was inked. Indeed, Kurnit's exercise price of $2.85 is profitable even at the current $4.01 price of Primedia stock.
In September of 2001, Primedia announced that Kurnit would at year-end be replaced as CEO of About by co-founder and President William Day. Kurnit's employment agreement on file with the Securities and Exchange Commission appears to provide that all of his options will now vest immediately rather than over four years; and that until 2005 he will continue to receive his $600,000 salary and $1,650,000 minimum bonus--13% more than Rogers's year 2000 cash compensation. Primedia wouldn't comment on my reading of Kurnit's severance; but it does seem that, at the least, he will get half.
In contrast to Kurnit's cagey timing, 2001 was lousy for Rogers and Primedia.
As in October 2000, the About sites remain solidly in the top ten of the Jupiter Media Metrix ranking of unique visitors. But the financial synergies touted for About and Primedia's 280 niche magazines, such as Modern Bride and Motor Trend, didn't happen.
Primedia had projected that the combo would increase earnings before interest, taxes, depreciation and amortization (EBITDA) by 40% in 2001, to $330 million on revenue of $2 billion. That included growing new-media revenue 30% to $185 million.
After issuing a September warning that 2001 EBITDA would instead fall below 2000's $250 million, Primedia reported nine-month new-media revenue of just $78 million--including $20 million worth of advertising credits transferred to About as part of the merger. Even a seasonally strong fourth quarter would leave full-year new-media revenue at least 35% below the original projection.
Primedia did, however, project that new media would be cash-positive throughout 2002. But the amount will be a rounding error against the company's totals. Gaining significant synergy anytime soon looks like a long shot.
The company's $2 billion debt load, up 25% in 2001, compounded the impact of the advertising downturn. There's been brutal cost-cutting, including 60% of About staff, and shedding of other operations. Investors haven't been hopeful. In 2001, the Dow Jones U.S. Advertising and Media Index fell 10%. Primedia shares tanked 64%.
Unfortunately, it's no longer possible to look to the canny Kurnit for signals. As an ex-officer, he won't be defined as an insider required to report buys and sells to the SEC. |
