12/11/95 THE UNLIKELY MOGUL

THE UNLIKELY MOGUL
Can Jerry Levin keep a grip on Time Warner? Don't count him out
As the Atlanta Braves edged the Cleveland Indians to win the chilly first game of this year's World Series, TV cameras panned in on media mogul Ted Turner in the warm embrace of actress Jane Fonda. No surprise there: The dashing Braves' owner and his beautiful wife are baseball's equivalent of the Royal Family. More puzzling, though, was the slight, graying man standing next to them in a dowdy ski jacket and a brand-new baseball cap. Ted and Jane's guest that evening looked more like the winner of a ``Sit in the Owner's Box'' sweepstakes than what he was: Turner's potential boss and head of Time Warner Inc.
Gerald M. Levin has never looked or acted like a media mogul. He rarely even tries. That wouldn't matter so much except that his relative lack of charisma is often linked to Time Warner's sagging stock price. Ever since early 1993, when he took over Time Warner's chairmanship from the late Steven J. Ross, Levin has been dogged by the notion that he is inappropriate for the job. His capital as chairman and CEO has sagged to the point where calls for his removal hardly raise an eyebrow.
But Levin is very much the CEO of Time Warner, and one morning in mid-November he proved it. He ushered one of his best-respected lieutenants into a room atop Time Warner's Rockefeller Center headquarters and fired him without warning. Michael J. Fuchs, the longtime chairman of Home Box Office Inc., had only six months earlier been assigned to clean up a messy set of executive mutinies at Warner Music Group Inc. Now, to pave the way for a broad corporate restructuring, he was being sacrificed for his inability to get along with rivals Robert A. Daly and Terry S. Semel, co-CEOs of the Warner Bros. Inc. studio.
CLEAN BREAK. A week earlier, in the same room, Time Warner's much-maligned chairman had concluded a series of interviews in which he described a six-year crusade to impose his vision on the company he helped create. It began in 1989 with the tumultuous merger of Time Inc. and Warner Communications Inc. It continues today with Levin's proposed $7.5 billion all-stock purchase of Turner Broadcasting System Inc. Levin insists there is logic to the chaos that swirls around Time Warner--a necessary tearing down before the real building can begin. ``I finally want to make as clear a break as possible into the future,'' says the 56-year-old executive. ``It will never be the old Warner Communications or the old Time Inc. again. It is going to be something totally different, as it must be.''
Levin is attempting nothing short of a corporate revolution. As such, it could easily blow up in his face. The Turner deal will confront big obstacles in Washington, in part because of the prominent role it gives Tele-Communications Inc. CEO John C. Malone, who owns 22% of Turner (page 96). Time Warner's valuable studio, HBO unit, and cable systems, meanwhile, are currently being held hostage by U S West Inc., which owns 25.5% of those assets and is suing to block the transaction. Even if the deal does get done and Levin can restructure the U S West partnership, he faces the biggest management challenge of his life: integrating two complex companies crawling with big egos. He has yet to prove he can truly lead a company with so many moving parts. ``I think this thing is really going to test Jerry,'' cautions one worried Time Warner director.
Levin has precious little time. Many investors are still mad at him for leading the Time Inc. team that forged the debt-laden Warner transaction instead of accepting a $200-a-share buyout offer from Paramount Communications Inc. Chairman Martin S. Davis in 1989. Since then, the stock has split 4 for 1, but it has missed history's greatest bull market entirely, creeping along at a compounded annual growth rate of 3.8%, compared to 10.5% for the Standard & Poor's 500-stock index (charts, page 88). It doesn't help that the Turner deal dilutes the stock by 32%. ``It's obscene,'' says Travelers Group Senior Vice-President for Investments Harvey P. Eisen. ``I'm a simple guy. I want the stock to go up.''
What Levin has done, however, is use the Turner deal to buy what might be his last chance to prove himself. He has doubled the bet on media concentration he placed in 1989 and convinced a broad group of constituents to trust him for at least a little longer.
Indeed, Levin is in a much stronger position than is commonly believed. If the deal closes in its current form, he will get direct voting control over the 9% of Time Warner that Malone would inherit in the stock swap. And for now, at least, Turner has pledged to vote his 10% with the board, which is largely friendly to Levin. Additional chunks of the stock are held by large investors such as Capital Group's Gordon Crawford or cable magnate Alan Gerry, who quietly support Levin's agenda. All told, 35% of the stock would end up in sympathetic hands.
RESULTS. Many investors grudgingly admit that Levin has assembled an impressive array of assets and that the operating results are improving steadily. They also think he's getting tougher. Wall Street responded vigorously to the Fuchs news by bidding the stock up almost two points, to 40, on Nov. 17. ``Jerry's job has been in jeopardy since the day he took it,'' says one large institutional investor. ``But shareholders like the direction he's moving.''
As Time Warner's biggest cable competitor, Malone had to relinquish his vote to comply with ownership rules. But he did not have to give it to Levin. He did so to give the Time Warner chairman precisely the kind of clout he used against Fuchs. Malone contends it is essential to empower Levin with at least some of the authority enjoyed by moguls such as Viacom Inc. Chairman Sumner M. Redstone or News Corp. founder Rupert Murdoch. They own large, unassailable chunks of their companies and can therefore act freely. ``What Jerry is lacking is real power,'' says Malone. ``And real power, as Mao said, flows from the muzzle of a gun. Jerry is a strong leader--he just hasn't had the power to exercise that leadership.''
Malone, of course, is slippery. Just ask Barry Diller, who counted on the TCI chief's support for his 1993 Paramount bid, only to see Malone bolt in the middle. He could similarly foul up this deal. Turner is also mercurial. His pledge to vote with the board expires if he leaves Time Warner's employ--something he doesn't rule out. He notes that former Blockbuster Entertainment Corp. Chairman H. Wayne Huizenga became vice-chairman of Viacom after he sold out to Redstone in 1994, only to leave this fall. ``I'll be vice-chairman, too,'' says Turner. ``I could be [at Time Warner] a long time, or the same thing could happen to me.''
Levin is clearly in a precarious situation. But the fact is, it is easiest for everyone if he succeeds. While it is often posited that Turner and Malone might gang up to sink Levin, the legal and logistical complications there are mind-boggling. If Levin succeeds and drives the stock to, say, 60, both Malone and Turner would be sitting on stakes worth $3 billion, tax free. Levin's unruly employees, many of them major shareholders, would also benefit. ``What we need and want,'' says Semel, ``is a strong Jerry Levin in New York.''
GOOD FIT. Levin, who this summer had planned to sell his 18% Turner stake to address mounting shareholder concerns over Time Warner's $18 billion in debt, has been criticized for swinging this way, then that, on strategy. To many, this deal looks expedient--a temporary lifesaver for Levin.
Maybe. But on paper, it makes plenty of sense. Already it has given Levin the excuse to restructure the company to eliminate Time Warner's self-destructive fiefdoms. And it would provide enough girth in entertainment to satisfy shareholders irritated by Levin's persistent investments in cable telecommunications and interactivity. It would also dilute his most acerbic shareholder, Seagram Co.'s Edgar Bronfman Jr., who owns a 15% stake, while welcoming Turner and Malone, who are both cable boosters. Bronfman declined to comment.
Investors, who tend to look forward, are mostly just pleased Levin is taking action. They applauded Fuchs's ouster largely because it signaled a restructuring that will fundamentally alter the company, no matter what happens with the deal. It allowed Levin to fold the sprawling music company into the studio to create a single, $10 billion entertainment division that will be run by Daly and Semel. The removal of Fuchs, one of Time Warner's strongest executives, rocked the company and sent a shiver through a boardroom reeling from bad news. But it also ended a destructive feud between Fuchs and the two studio heads that had threatened indigestion as Time Warner moved to swallow Turner.
Levin plans to break the company into three major units: Entertainment, News and Information, and Telecommunications (the cable business). The idea is to encourage the kinds of synergies that have always eluded the current Time Warner. Levin insists that the Turner assets are such a good fit that they will ``compel a kind of teamwork'' among Time Warner's famously fractious managers. Distributing Turner's New Line films through Warner Bros. is a no-brainer, he says. Ditto for putting Warner's new cartoons on Turner's Cartoon Network or Lois and Clark reruns on TNT.
Segregating the entertainment and journalism properties into their own divisions, Levin says, will force top managers to encourage teamwork below them. Instead of battling HBO, the movie studio will work with it--if only because they will have the same boss. To help that along, Levin has reworked executive pay so that incentives encourage managers to beat Wall Street's expectations while rewarding teamwork rather than just divisional performance.
All of that is much easier said than done, of course, and before investors will bid up Time Warner stock, Levin will have to finish his plan to spin the highly regulated, capital-intensive cable systems into a self-financing entity. The idea is to take the hefty cable leverage off Time Warner's debt-soaked balance sheet. That will require Levin to cut a new deal with U S West, which is threatening to use its stakes in the studio, HBO, and the cable systems to thwart all of his grand plans. Most analysts expect Levin will do it. But given U S West's leverage, it will likely end up with a sweet deal to run half of the separate cable entity.
SURVIVOR. Whether Levin is up to the task is the $7.5 billion question. Reviewing his career for clues to future performance leads to the conclusion that he has often promised more than he has delivered. A private, inscrutable man, even among friends, Levin's true motivations are hard to figure out. But one thing is certain: Despite his popular image, Levin hasn't survived Time Warner's jungles this long by hiding in a bunker. He is an inveterate risk-taker, with deceptive tenacity and an unusually strong sense of self-confidence. His great challenge will be shifting from jungle survivor to corporate leader.
It's not that Levin can't get Time Warner's operations to perform. Cash flow has grown at a steady, if unspectacular, 10%, compounded annually, since Levin took over. Levin has also moved decisively to install new management at the publishing division, which has paid off in a 43% spike in cash flow since 1992. Wall Street's biggest beef has been Levin's stubborn insistence on adding more debt to build up Time Warner's cable business in the face of government-mandated rate cuts. Investors also distrust Levin's ability to lead, having watched him lurch from crisis to crisis.
Some of the heat Levin gets is unwarranted. The troublesome divisional structure, after all, was Ross's, and it was loaded from the start with ego-driven executives who would not have listened to anybody but the late chairman. Those executives have caused Levin no end of headaches by pushing their own agendas. And disciplining them is complicated by their strong individual results.
CABLE CASH. As for the cable strategy, consider this: Levin inherited the second-biggest cable company in the world. Selling it didn't make sense. It does require a lot of capital, but it also generates 31% of Time Warner's cash flow. When values were depressed during the doldrums of rate rollbacks, Levin bought 4 million more subscribers at bargain prices. Now, cable cash flows are coming back, and the industry might soon be deregulated. Rupert Murdoch, who doesn't have to worry much about his stock price, has become a billionaire using just such contrarian investing.
That said, however, Levin's history raises some serious questions about his ability to guide a ship as big as Time Warner. While he shares Murdoch's penchant for taking big risks, his track record on rewards is spotty. For one thing, Levin clearly should have moved faster to address shareholder concerns about debt. After Viacom's Redstone bought Paramount in 1994, he moved swiftly to jettison its valuable Madison Square Garden assets and its much smaller set of cable systems. To pare his debt, Levin sold stakes in the studio, HBO, and cable to U S West in 1993 for $2.5 billion. At the time, it looked as if the Baby Bell might help Time Warner get into the telephone business. But the benefits have been few, the entanglements many.
Levin has also yet to prove that he can command the respect of the corporation. The recent blowup in the record business might have been inevitable given the volatile egos involved. But when Atlantic Records chief Doug Morris assembled a team of managers and threatened to leave en masse unless Levin fired Morris' boss--Warner Music chief Bob Morgado--it was clear the chairman was lacking political clout. And even though Levin brought the matter under control by placing music under Semel and Daly, the turmoil has been damaging. ``People are starting to ask whether there is going to be stability,'' says Ramon Lopez, head of Warner Music International.
Malone likens recent history at Time Warner to a feudal state. Speaking to analysts after the deal was announced, he said: ``It's kind of like medieval England, where the barons really have all the power, the king is almost titular, and the subjects--i.e., the shareholders--don't even come into the equation.'' Malone suggests that with his new power base, Levin will be able to enforce his will upon the corporation. That, he figures, will in turn benefit shareholders.
But even Levin admits this is simplistic. He politely scoffs at the idea that his power might flow through TCI's wily chief executive. ``Empowerment,'' he says, ``comes when you believe in your ideas and have the force of your convictions.'' Levin thinks the Turner deal can earn him the respect he needs inside and outside the company: ``I don't care what anybody says. It is a very good idea for both companies.''
Discovering how to lead will be crucial. But Levin rejects outright the notion that a media mogul must be flamboyant or charismatic. And he has plenty of supporters there. ``He hasn't said he's going to start wearing lifts in his shoes or get a nose job,'' says longtime director Lawrence B. Buttenweiser, a Ross hire. ``He's not fabulously attractive to the press. But that, in the final analysis, is not what counts.''
What has counted in Levin's case is a tenacious belief in his own ideas. He has made up for his lack of charisma with stubbornness and staying power. He has a vast ability to absorb huge amounts of information and marshall facts to his cause. This has helped him sway his board to stick with his controversial cable strategy.
PRECOCIOUS. Levin's staunch self-confidence comes as a surprise to those used to his cranky, defensive public image. But it is almost as old as he is. ``When I met Jerry, he was 16 going on 47,'' says Carol Levin, his first wife. (They divorced in 1970.) ``He had this maturity and sense of self. But you could have a close conversation with him and still not know what was really on his mind.''
Levin grew up in suburban Philadelphia. His grandparents on both sides were Jews who had fled persecution in Eastern Europe. Jerry's father ran the family's butter-and-egg business. His mother taught piano.
Jerry was smart and precocious from the start. He happily went to sleep-over camp when he was 5. Before he was 10, he knew enough Hebrew to conduct a service at the local synagogue when the cantor failed to show up one Saturday. He won a public-speaking contest in junior high and starred in high school plays.
It has been widely reported that Levin was a ``biblical studies'' major at Haverford College, and therefore quite religious. In fact, Haverford caused him to question his strict Jewish upbringing. He majored in biblical literature and became fascinated with the nexus between the Old and New Testaments. Since there was such a close connection, he couldn't understand the animosity between the cultures. ``My thesis was on the continuity between the Judaic and Christian traditions,'' Levin says. ``I made a complete transformation through college, coming out very spiritual, but areligious.''
Levin was valedictorian at Haverford and won honors for his thesis. On principle, though, he rejected the honors and burned all of his papers to make a philosophical statement that the work counted more. Despite such intellectual grandstanding, he was not considered arrogant or nerdy. ``He was very jolly and gregarious for at least part of the day,'' says a roommate, Brownlow Speer. ``But at 8 p.m. or so he'd start studying, and you wouldn't see him.''
Levin's personal discipline is legendary among colleagues. So is his appetite for information. He was the kind of kid who could recite batting averages of members of the Philadelphia Athletics. A movie lover, he can still tell you which film won the Best Picture Oscar for any year.
Each morning, after a half-hour jog at dawn, Levin reads five newspapers, then moves on to the various media and entertainment trade journals, and finally turns to several newsletters and the wires. He sees every movie that comes out of Warner Bros. and most of its TV shows. It's not unusual for him and his second wife, Barbara, to devote an entire weekend to movie-watching. He reads fiction before bed, getting by on four or five hours of sleep a night.
BUGABOOS. Levin is also an awkward fixture at the countless events in New York and Hollywood that swirl around top entertainment executives. One HBO exec still giggles about the book party for Sex, Madonna's controversial celebration of everything but the missionary position. On arriving, the executive remembers turning to see one actress bent over to receive a tattoo on her buttocks. Up on pedestals, transvestites gyrated in leather corsets. Madonna herself was being led around on a leash. In the middle of it all, she bumped into Jerry Levin, alone and looking vaguely bewildered. He had slipped into a Warner Bros. baseball jacket for the occasion.
Levin turns all this information into ideas, and ideas into strategies. His most notable accomplishment at Time Inc., for instance, was his decision in 1975 to put the fledgling HBO on a satellite. Nobody else had thought of it, and the move revolutionized cable network distribution. It also assured HBO's survival and earned Levin the in-house nickname ``resident genius.''
Levin's greatest bugaboo, however, has been fighting the persistent charge that he's a better strategist than manager. It began at Time Inc. during the 1980s, when several high-profile, Levin-sponsored projects bombed: Teletext, a service designed to deliver on-demand news to TV via cable, ate up $35 million before Time killed it. Subscription TV lost as much as $100 million. Worse was a movie-development deal with Tri-Star Pictures that left the amount of Time investment in the films uncapped. No matter how much a film ran over budget, Time was on the hook for a third of the cost.
For those and other reasons, Levin lost a prolonged battle for CEO of Time Inc. to Nicholas J. Nicholas Jr. And by the time the Warner deal came along in 1988, he was a lame-duck corporate strategist. Many wondered why he stuck around. Levin says that while he was indeed frustrated, he also felt that Time was on the brink of change and that he could influence it. ``I had a sense of mission about Time Inc.,'' he says. ``It was the kind of business that I thought had meaning, that satisfied my soul. I believed with a kind of messianic zeal that I could figure out what it needed. But I didn't need to run the company to do that.''
What came next is testament to Levin's arrogant sense of self. When Davis came along with his $200 offer, it sent Time into turmoil. Chairman J. Richard Munroe had already signed off on an attractive all-stock deal to purchase Warner. Davis' offer threatened to plunder it. ``It was living each day with the survival of your company at stake,'' Levin says. ``And I came to believe in my heart that I was basically in charge. No one else could handle the pressure particularly well. They were bouncing back and forth about what to do. I realized I had another facet to my complex personality, and it had to do with being steely in the face of pressure. I didn't translate it into, `Ultimately, I'm gonna run this thing.' But it gave me significant reinforcement that I had to play an essential role going forward.''
Nobody ever guessed Levin's role would expand as far as it did. But he insists this sense of manifest destiny informed a string of controversial moves that landed him in the chairman's seat. He participated (with Ross and Fuchs) in the ouster of Nicholas as co-CEO in 1991. And as Ross lay dying of prostate cancer in 1992, Levin forced the resignations of nine board members, adding several of his own. The news was announced the same day Ross died. ``Changing the board was maybe the toughest experience of my life,'' Levin says. ``Why is it O.K. to evaluate CEOs and fire them but you can't evaluate board members? People say this is roaring ambition and handpicking boards. But that's not me. You don't have to believe that, but I know who I am and why I did it. We had to get our blue-chip status back.''
Levin's tendency to explain his actions in broad philosophical terms puzzles colleagues. He doesn't revel in power or show it off, so friends try to believe him when he says his ambition has a higher purpose. But they still wonder. ``He doesn't open up. He doesn't show his hand,'' says one person who worked closely with Levin until recently. ``Sometimes I think he's not political at all, other times I think he's so political you just can't tell.''
In the final analysis, Levin's motives don't much matter as long as he produces. But can he turn his strategic vision for Turner from rhetoric to reality? It will take more than friendly, like-minded shareholders. And it will require a brand of leadership that depends less on terror and more on inspiring a large, complex organization.
It's hard to forget that Levin has presided over a period in which the highly profitable record group lost several industry legends, including Mo Ostin and Bob Krasnow. You can't gloss over the fact he has paid nearly $100 million in severance to these and other executives, or promised $100 million in a pay package to Turner, or gave John Malone a sweetheart deal to buy into the Turner transaction. Levin explains all that as the unfortunate byproduct of achieving a greater good. Transforming Time Warner is simply a dirty job.
It's unlikely shareholders will buy such logic for long. It doesn't take an MBA to know that mergers rarely ``compel'' anything but headaches. It takes hard work, tough discipline, and deft management skill to cure them. Levin says there's already a new attitude at Time Warner, but what about this: The company's publishing division recently got together with its cable unit to create an Internet service that could be sold over cable modems. Since its selling point would be high-speed delivery of Internet fare, they thought to call the service Road Runner, after the Warner Bros. cartoon bird. Trouble is, Warner Bros. owns that copyright and wouldn't give it up. So the new consortium had to resort to a lame second choice, Line Runner.
Such foolishness at Time Warner has to end. Given Levin's stubborn track record, he may yet be the one to end it. But he's still a long way from home.

Levin's New, Improved Time Warner
What Time Warner and Turner combined will look like:

ENTERTAINMENT
-- WARNER BROS.
Movies, video, cartoons, television, DC Comics
-- WARNER MUSIC GROUP
-- HOME BOX OFFICE
-- TBS
-- TURNER NETWORK TELEVISION
-- CARTOON NETWORK
-- CASTLE ROCK ENTERTAINMENT
-- NEW LINE CINEMA
-- HANNA-BARBERA CARTOONS
-- ATLANTA BRAVES, HAWKS
Total revenue *$13.8 BILLION
Operating cash flow *$1.96 BILLION

NEWS
-- CABLE NEWS NETWORK
-- TIME INC.
Magazines including Time, Sports Illustrated, People; Books
Total revenue *$4.45 BILLION
Operating cash flow *$745 MILLION

CABLE
-- TIME WARNER CABLE
11 million subscribers
Total revenue *$2.3 BILLION
Operating cash flow *$1 BILLION
*1995 ESTIMATES
DATA: LEHMAN BROS. INC., BUSINESS WEEK
By Michael Oneal in New York