Media giants feeling the Enron effect

Feb 11, 2002  •  Post A Comment

Honesty and accountability to your shareholders matter.
That is Wall Street’s pointed message to large media concerns since the Enron debacle initiated a widespread intense scrutiny of public company management and financial practices.
The fallout will be unsettling and necessary for all public companies.
It comes at a time when media and entertainment companies already are tangled in new accounting rules, complicated industry economics, a technology sea change and arresting consolidation.
For Viacom, that’s been compounded by the recent headline grabbing power struggle between Viacom Chairman Sumner Redstone and Chief Operating Officer Mel Karmazin that’s caused shareholder doubt because of conflicting reports by the press and the company itself.
Walt Disney Co. Chairman Michael Eisner announced during a recent earnings call that his company would retain PricewaterhouseCoopers as its longtime auditor as long as the firm separates its consulting and auditing divisions, which PricewaterhouseCoopers plans to do in reaction to Enron’s tangled ties with its auditor Arthur Andersen.
Selective disclosure
But when analysts asked Disney President Bob Iger to elaborate on the adverse impact the ABC TV Network ratings slump has had on ABC’s owned TV stations’ revenues and cash flow (the numbers are currently buried in Disney’s larger Media Networks unit), he flatly declined.
Such selective financial disclosure is not uncommon for media companies, particularly when their operations are experiencing tough times. But in light of recent events, there will and should be increased pressure on public media companies to be more forthright about every aspect of their financial performance and operations.
“Conglomerates like Disney and Viacom have been hiding their bad results, particularly in the owned stations, which are the largest contributor to earnings in their television units,” said veteran analyst Tom Wolzien of Sanford Bernstein, who used to work at NBC. “We know that TV stations across the country have had a real difficult time the past year. But the response is not conducive to what the Street expects, which is full and open disclosure.”
During his company’s recent quarterly earnings call, AOL Time Warner CEO-elect Richard Parsons said the company will do all it can to help industry analysts understand the reasons for an anticipated $40 billion to $60 billion first-quarter goodwill write-off.
At the same time, Mr. Parsons made clear AOL Time Warner is embracing a more conservative forecasting stance. The company also told analysts it would provide less divisional detail and focus in an effort to encourage Wall Street to assess the company as a strategic whole.
While setting the bar for future financial performance may be prudent, trying to shape investor opinion by relying on select information may not be in this new environment.
However, the honesty and accountability being called for do not apply only to corporate finances, but also extend to a company’s operations and top executives.
All eyes will be on Mr. Redstone and Mr. Karmazin during Viacom’s Feb. 13 earnings call and the private investor dinner to follow, looking for signs of their widely reported differences. One of the most controversial aspects of Viacom’s corporate turmoil is the seeming contradiction between company statements and press accounts about the two men and their relations. A Feb. 1 corporate statement refuted what Viacom directors and senior executives have been telling investors and the press about whether Mr. Redstone told the Viacom board he will not renew Mr. Karmazin’s contract when it expires at the end of 2003. The company maintains that neither executive has yet announced his intentions.
While media analysts say they are accustomed to bigger-than-life personalities and executive power plays, such circumstances have much to do with management integrity and accurately conveying information to Wall Street. Unlike financial practices and reporting, such matters are governed less by concrete rules and more by conscience.
While the executive turmoil has taken a devastating toll on Viacom stock, it also could eventually hurt the company’s operations and bottom line. Any way you cut it, it is a shareholder matter at a public company.
“The less detail and integrity from a company, the more its stock is going to be punished,” Mr. Wolzien said. “Every lie a company tells, every time it denies something going on internally that everyone on the Street knows is going on internally, it hurts the credibility of a company and its stock.”
Indeed, public companies must maintain a trust with investors the same way licensed media concerns must maintain a public trust.
While there is no place on corporate balance sheets for veracity and shareholder confidence, corporate response to these latest questions and challenges will have an immediate and decisive impact on their stocks and bottom line.
That is why the Enron situation, fraught with what appears to be the worst kind of financial violations and management negligence, is having such a devastating effect on the stock market overall and on all public companies-helping to set shares tumbling for media companies such as AOL Time Warner (down 51 percent), Viacom (down 35 percent) and General Electric Co. (down 24 percent) in the past year.
The Enron debacle strikes at the heart of something fundamental to so many media-related companies right now: the considerable shareholder confusion over big numbers at big companies involved in big deals.
Last week, Mr. Wolzien released the results of a study he conducted with six of the largest media companies he follows-AOL Time Warner, Viacom, Disney, Comcast Corp., Liberty Media Corp. and Cox Communications-to determine their undisclosed off-balance-sheet liabilities. Many of them are industry-related, such as backlog or future revenue not yet received for licensed television programming, TV and film production financing, entertainment joint ventures and outside investments.
“It doesn’t appear that there is anything at these companies that could potentially take them apart or be more of a problem for them in strained financial times,” Mr. Wolzien concluded. “But it will take more analysis and study to be sure.”
Assuming the worst
One high-level media executive last week confided, “These new challenges and pressures have sent companies scrambling for ways to explain themselves. Even if you did nothing wrong, investors will now assume the worst until you help them to understand. That’s how Enron has changed things.”
Media company executives and analysts I spoke with last week said that in addition to firms re-examining financial disclosure and guidance, they also expect all constituency sectors-from accountants and consultants to bankers and analysts-to be forced to rethink what they do.
“All companies straddle the line between disclosing enough financial data to comply with rules and shareholder expectations and serving their own needs and interests,” the high-level media executive said. “But the perception and the reality of propriety never counted more.”