GMST--+24%--(??)
Murdoch, Yuen Play Endgame
For Once Highflying Gemstar
Proposal Would Shift Firm to Traditional
Media Focus, Away From Interactive Hopes
By JOHN LIPPMAN
Staff Reporter of THE WALL STREET JOURNAL
Now that Rupert Murdoch appears close to taking control of Gemstar-TV Guide International Inc., the once highflying patent company that promised to be the gateway to the 500-channel universe is likely to move forward with scaled-down ambitions but a more practical strategy.
Under founder and Chief Executive Henry Yuen, Gemstar has sought, through brutal negotiations and aggressive legal tactics, to establish its nascent on-screen interactive-program guide as the accepted standard in the cable and satellite-television market. But with Mr. Yuen supposedly agreeing to take a back seat in the operations of Gemstar in the future, the company will evolve into a more traditional media concern where old-fashioned print and cable-TV programming predominate.
Gemstar announced late Wednesday that a "joint" proposal has been put forth to the company's board by Mr. Yuen and Mr. Murdoch's News Corp. to resolve the corporate-governance issues that the two entrepreneurs have been battling over for the better part of this year.
According to people close to the situation, the proposal includes Mr. Yuen and his longtime associate and chief financial officer, Elsie Leung, taking on new "nonexecutive" roles in the company. Although Mr. Yuen and Ms. Leung both would remain on Gemstar's board, Mr. Yuen would no longer cast the tie-breaking vote.
GEMSTAR'S FUZZY PICTURE
Investors hope Rupert Murdoch's move to gain control of Gemstar-TV Guide will help to stabilize the company.
1. June 8, 2001: Gemstar says the Justice Department's antitrust division is "narrowly" probing activities between Gemstar and TV Guide in the months preceding the closing of their $14.2 billion merger in July 2000.
2. April 1, 2002: Gemstar reports in an SEC filing that it hadn't yet received about $108 million in license revenue that it booked over the past 29 months.
3. April 25: The public learns of a December staff opinion of the International Trade Commission, saying Gemstar has engaged in patent misuse and its patent claims haven't been infringed.
4. June 23: The ITC rules that Gemstar's patents haven't been infringed by rival guides included in imported set-top cable boxes. Its stock drops 39%.
5. August 14: Gemstar and News Corp. submit "joint proposal" to restructure Gemstar's management, including Gemstar CEO Henry Yuen becoming nonexecutive chairman.
Sources: Thomson Datastream; WSJ research
Moreover, News Corp., which owns 42.5% of Gemstar, no longer would be subject to a "standstill agreement" limiting its stake in Gemstar to 49%, which could pave the way for News Corp. to buy up the shares it doesn't already own. Mr. Yuen and Ms. Leung also would share a payment of about $50 million as part of the agreement to step aside, the person said.
It has been a rapid rise and reversal for Mr. Yuen, 54 years old, who had promoted himself as a visionary of interactive television. Gemstar's shares once traded at more than $90 apiece, and the company was valued at more than $36 billion near the peak of the Internet bubble. Thursday, Gemstar's shares were up 20 cents, or 6%, at $3.54 in 4 p.m. New York Stock Exchange composite trading, giving the company a market capitalization of $1.66 billion.
People close to the companies said that although the proposal is firm at this time, it is still possible that either Mr. Yuen or News Corp. could have second thoughts. Mr. Yuen is unpredictable and could change his mind, these people said, and auditors might discover additional financial abnormalities that could cause News Corp. to alter its course.
Part 2
The lurking question at the moment regards Gemstar's financial statements. On Wednesday, Gemstar disclosed that it would have to restate its financial statements for the year ended Dec. 31, 2001. The restatement has to do with how advertising revenue is recognized internally between TV Guide and Gemstar's interactive-program guide and won't affect overall 2001 or 2002 consolidated results.
But Gemstar said its audit committee also is reviewing "certain other transactions" relating to how advertising sales are allocated between the magazine and the interactive-program guide. The continuing review meant Gemstar was unable to meet Wednesday's deadline to certify its financial statements and file its second-quarter results with the Securities and Exchange Commission.
Advertising on Gemstar's interactive-program guide, touted as the company's "New Economy" growth engine, accounted for only about $100 million of the company's $1.4 billion in revenue last year. Gemstar often "packaged" ad sales for TV Guide together with sales for its interactive-program guide, and if ad sales were improperly attributed to the on-screen guide when they should have been attributed to TV Guide, then New Economy advertising is growing much more slowly than previously believed.
With Mr. Yuen and Ms. Leung effectively out of the way, News Corp. can implement its plan to revitalize Gemstar's chief asset, TV Guide magazine, which has suffered systemic circulation declines for nearly 20 years. In addition, News Corp. will have more sway in trying to repair Gemstar's relations with the cable industry, which have been in tatters over the company's hardball tactics with cable operators.
"Under Henry, it was a patent-protection company," says John Tinker, an analyst with Blaylock & Partners LP in New York. "Now it's going to be a media company driven by TV Guide, with the interactive program guide as supplemental. But that's not a bad place to start."
Responsibility for the turnaround effort will fall on Jeff Shell, co-president of Gemstar who is expected to succeed Mr. Yuen as chief executive. The well-regarded Mr. Shell formerly oversaw News Corp.'s stable of cable-TV channels.
But shifting Gemstar's strategy to a more conventional media focus from pie-in-the-sky promises about its cutting-edge role in the world of digital TV will remain a formidable task. Gemstar's two recent legal setbacks in defending some of its interactive-TV patents have badly damaged its contention that the patents are "unassailable." That has emboldened competitors, such as Scientific-Atlanta Inc. and EchoStar Communications Corp., to offer cable operators an alternative. |
