Vive Investor Capitalism

Knowledge at Wharton: What does Vivendi’s purchase of Seagram signify?

Useem: Vivendi’s $34 billion acquisition of Seagram shows that in the media industry as in others, global is good. The purchase reaffirms the conclusion of the AOL/Time-Warner and CBS-Viacom mergers, that companies that produce content and those that serve as conduits work well together. In addition to spirits like Chivas Regal whisky and Absolut vodka, Seagram produces music, films, and television through its Universal Music, Pictures, and Studios. Vivendi can deliver these through its diverse array of cellular telephones, pay televisions, and internet portals. The combined operations will become the newest media colossus serving 80 million customers. Whatever the strategic value of the integration of two giants – more than 300,000 people are on their payrolls and a market cap of $100 billion is expected – the merger is also one more nail in the demise of family capitalism and the rise of investor capitalism.

Knowledge at Wharton: How so?

Useem: Seagram is synonymous with the Bronfman family, just as Ford is with the Ford family. Samuel Bronfman founded Distillers Corporation in 1924, and now Edgar M. Bronfman is chairman, Charles R. Bronfman is co-chairman, Edgar Bronfman Jr. is chief executive, and Samuel Bronfman II is a division president and company director. The Bronfmans, like the Fords, never gave up a controlling interest in their company. In an era when even 10% of a large company’s stock can ensure family control, the Bronfmans retain 24%. The Bronfmans never considered yielding control until Seagram met the iron discipline of investor capitalism.

Knowledge at Wharton: What is investor capitalism?

Useem: I develop the concept in my 1996 book, "Investor Capitalism: How Money Managers are Changing the Face of Corporate America." During the 1970s and 1980s, several hundred institutional shareholders—pension funds, bank trusts, insurance firms, endowment trusts, and money managers—built massive stakes in American enterprises. In the 1990s they learned to convert their economic dominance into political muscle. The same trend continues today—professional money managers and stock analysts rule the roost.

If company results are unsatisfactory, the captains of investor capitalism become impatient. In recent months, angry investors have forced out the CEOs at Mattel, Procter & Gamble, and Xerox, adding them to a trophy shelf already filled with executives’ heads from Bank One, British Airways, and Compaq Computer. Investor discipline has just two rules: Deliver value to shareholders on a par with other large companies, and never surprise the stock analysts. If you fail to do so several quarters in a row, you’re on a short leash. Go more than four quarters, and you’re on a death watch. Research shows that a drop in a company’s stock price by half over 12 months will double the likelihood that a CEO will get the sack.

Knowledge at Wharton: Is this primarily a U.S. phenomenon?

Useem: Even in Germany and Japan, until recently the paragons of owner patience, the likelihood of a CEO being dismissed as the result of a declining stock price has risen by a third. Research also shows that falling short of analyst expectations is more certain to threaten your livelihood than declining earnings. Another rule also applies: Become or stay a pure play. Only GE’s Jack Welch can break that tenet.

Knowledge at Wharton: How did these factors operate in Seagram’s case? Did they spur the takeover by Vivendi?

Useem: Seagram’s current CEO doubled his stock price since he took office in 1994. Unfortunately, the S&P 500 average tripled over the same period. Edgar Bronfman Jr. saw growth in music, but it did not come fast enough. He pulled Seagram out of its curious investment in Dupont – Seagram held 24% of the chemical company and five seats on its board. But he then poured $9 billion into Hollywood, viewing the images on MCA’s film as being more valuable than the chemicals in it.

Though movie makers and liquor producers may share synergies, the reinvented company was still far from a pure play. Investment analysts fretted. Hostile raiders threatened. The time had come for the family to give up the family jewel. The iron laws of the capital market said it should, and Seagram quietly said it would. All that remained was to attract the right acquirer, and Vivendi stepped forward.

Founder Samuel Bronfman would have been appalled. But three-quarters of a century later, Edgar Jr. comprehended what his grandfather could not have foreseen. He will serve as vice-chairman of Vivendi Universal, and his family will control 8% of the stock. But Bronfman will now be on his own, working with CEO Jean-Marie Messier to build an enterprise with allegiance to no family.

Knowledge at Wharton: Do you see a future for family enterprise? Or will investor capitalism eliminate family-owned businesses, especially among large companies?

Useem: Remnants of family enterprise remain evident among some corporations. The largest stockholder in about a tenth of large public firms is still a family owner. Yet even among these it is rare for the family scion to be at the helm. Henry Ford’s great-grandson, William Clay Ford Jr., is chairman of the Ford board but Jacques Nasser runs the enterprise. Third generation Edgar Jr. as Seagram CEO was one of the few exceptions left.

Some studies report superior financial performance of family-controlled enterprises. The consistent conclusion from a welter of research studies, however, is that what really matters is an ownership stake in management decisions. Whether this is achieved through family ownership of large blocks of stock or management ownership of large blocks of options, those who run the enterprise must come to work every day for more than the job. For success in a world of forceful and fickle investors, what counts is a riveting focus on predictable profits – including their own.

Knowledge at Wharton: What lies ahead for Vivendi Universal?

Useem: Edgar Bronfman Jr. and Jean-Marie Messier will find themselves in a fishbowl in the months ahead. All their actions will be evaluated by the exacting world of investor capitalism. Families can tolerate under-performance by one of their own, but institutional investors won’t. What will ultimately count is whether Vivendi Universal finds a sustainable advantage over its competitors. Investors impose, executives dispose, and the leadership of Bronfman and Messier will have to find the right edge.

Herbert Kelleher at Southwest Airlines, Meg Whitman at eBay, and Jeff Bezos at Amazon.com have proven that top talent can indeed be a sustainable advantage. Venture capitalists and institutional holders bet on those companies in part for their business model – but also in large part for those who will evolve and execute it. And what counts here is their talent for leadership, not their ties of brotherhood.