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Video Venture: Taking Charge of Blockbuster|
Riding the elevator to the penthouse suite of the Marriott Harbor Beach Resort in Fort Lauderdale, Wayne Huizenga wondered what it was that his friend Melk wanted to talk about. Melk liked staying at the oceanfront hotel, particularly since he had an ownership stake along with Huizenga and other partners and one of the bennies was that he didn't have to pay for the suite, an attitude that Huizenga found amusing. It was a glorious, sunny December day in Fort Lauderdale, but Huizenga knew that Melk wasn't visiting just to escape the brutal winter winds of Chicago. This had to be about a deal, of that Huizenga was sure. The two men had done hundreds of deals together in building Waste Management and, like any good partnership, they knew each others' strengths and weaknesses. In the four years since they'd left Waste Management, they'd run dozens of deals by each other. Some of the ones Huizenga would invest in, Melk would take a pass, and vice-versa.
For his part, Melk had prepared for the meeting. Numbers were what turned Huizenga on, he knew, and he was going to give him plenty of good numbers. This video store deal looked real good. He wanted his friend to join in an investment, maybe just a franchise, maybe something bigger. "I want you to look at this," he told Huizenga. "This is one fantastic deal. This is really an exciting deal." Scanning the pages quickly, Huizenga threw the folder back on the coffee table with scorn. "You know I get 20 of these a week," he told Melk. "Come on, John. A video store? I'm not interested."
To Huizenga, who rarely watched movies and didn't own a VCR, the video rental business held absolutely no appeal. It brought to mind sleazy joints in bad neighborhoods. Even if the industry was becoming more legitimate, to Huizenga, it had all the markings of a fad. It was dependent on a technology that might soon be obsolete, too ethereal for his taste. He liked real businesses, services that people used: lawn care, pest control, bottled water. Give good service and there'd be no reason for them to go elsewhere. With that philosophy, he'd been assembling his own collection of such companies he was planning to take public.
Melk checked his irritation at his friend's reaction. He changed the subject and shelved the projections in his briefcase. But he knew Wayne Huizenga well enough to keep up the campaign. He was convinced this was the right business for them and that Huizenga was the right guy to run it. He enlisted Don Flynn, who was still chief financial officer of Waste Management, to help him. Melk knew that Huizenga respected Flynn's acumen with finances and his involvement would carry some weight. The two friends kept up the pressure. "I know you're not high on it but you ought to take a look. That video store makes a lot of sense," Flynn would say when he and Huizenga talked.
Melk was so persistent, so unrelenting, that Huizenga told his wife, Marti, that he knew he'd have to visit the store sometime, because Melk just wouldn't give up. On one of his periodic calls to Huizenga, Melk learned from Marti that he was in Chicago. Huizenga had gone to see his friend, Chuck Lewis, at Merrill Lynch, on February 3 about taking the service companies public. Melk insisted that Huizenga look at the store before he left town.
Indulging his friend, Huizenga relented. As he toured the store on Lombard in suburban Chicago, Huizenga felt that twinge of excitement, that sixth sense that told him this was a really good business and could be a great deal. "I walked into the store and you know, wow! What a difference! And that's where our slogan first came from. Tom Gruber (a McDonald's executive hired in late 1987 who spearheaded Blockbuster's marketing drive) came up with the slogan, but it was based on what we said when we first went to see the store--Wow! What a difference!" Melk then called Scott Beck, who showed Huizenga around the store and went through the numbers and explained his territory. He had stores in Chicago, Atlanta, and Detroit and rights to Milwaukee, Minneapolis, and St. Paul.
Blockbuster: The Beginning
Scott Beck had grown up a bit of a rarity--a rich man's son with lots of confidence but also plenty of drive. His father, Lawrence, had retired as one of the founders of Waste Management. Scott was enrolled at the University of Arizona in Tucson, but decided to take some time off. He bought a BMW motorcycle and cruised through the country for 16 months. He ended up enrolling in Southern Methodist University in Dallas because it had a study program in England and Beck had always wanted to go to school in London. While in London, he stayed at John Melk's house. Melk headed up international operations for Waste Management.
After graduating, Beck founded Pace Investment. He invested money for clients in limited partnerships and other investments. In October 1985, Beck got a call from a stockbroker friend in the Los Angeles office of Bear Stearns about a video store opening in Dallas. The broker said he was going to buy the company's stock and suggested that Beck take a look, too. An avid movie renter, he instantly recognized the store's appeal and its market potential. "It was like IBM and McDonald's had opened a video store." Wandering around the store, he bumped into Sandy Cook who was restocking shelves, and started pestering her with questions. She asked if he was a competitor. He said no, but he was an interested investor.
Sandy Cook was a video buff who had wanted to open a video rental store. But not just any video store. What coalesced into the Blockbuster concept was a combination of her disappointment with limited selection at small stores, the personal pride of her ex-husband, David Cook, and the stubbornness of a small, local video store chain owner who reneged on a deal to sell his company.
By 1985, the videocassette recorder was well on its way to becoming a standard entertainment appliance for the average American household. Prices for VCRs had been dropping since their introduction a decade earlier, making them no longer a plaything for the wealthy. By then, 28 percent of U.S. "television households" had a VCR and that number was expected to more than double in five years. The format known as video home system, or VHS, had beaten out Sony_s Betamax as the machine of choice in the marketplace. And Hollywood had called a truce in its epic legal battle against the tide of technology as it realized the lucrative new revenue stream the machines produced.
No longer were VCRs merely tools of "time-shifters" who wanted to record episodes of "Hillstreet Blues" or "Family Ties" to be watched later. Ever since George Atkinson had started a video rental club in 1978 in Los Angeles by running ads in the Los Angeles Times, thousands of video stores had sprung up to satisfy the demand by Americans who wanted to watch prerecorded movies, but not plunk down $49.95 per tape to build a library of films. "The VCR and the prerecorded videocassette set hearts on fire in entrepreneurial breasts all over the land, Americans from every imaginable walk of life cracked open their nest eggs, remortgaged their homes, and put the arm on their parents, siblings, and in-laws in order to become the proud proprietors of Video Castles, Connections, Corners, Hutches, Huts, Palaces, Patches, Places, Shacks, Sheds, Sources, Spots and Stations. It was as if someone had hung a classified ad in the sky: "Retail Oppty.-Lo cash/EZ Startup."
Video retail specialty stores blossomed from 7,000 outlets in 1983 to an estimated 19,000 by 1986. Lured by the prospect of building traffic and a few bucks per transaction, supermarkets, convenience marts, music stores and book shops began offering videos for rent. These two factors--the ease of entry into the business and the proliferation of video rental outlets--would haunt Blockbuster from its inception and later spur Huizenga to grow the business at breakneck speed.
Into this industry milieu in 1985 stepped the Cooks. But David Cook wasn't an undercapitalized entrepreneur trying to make a killing in the latest business craze. He had money. Cook had taught himself to write computer programs for business applications just as the power of computers was being harnessed for more and more business uses. He started writing real estate programs in 1978, then created a new program for the oil industry. David P. Cook & Associates rode the oil boom and by 1982 had five offices, 85 employees and hundreds of oil company clients. In preparation to go public, he hired Kenneth W. Anderson who had experience as a chief financial officer with several large, publicly traded companies. The offering on February 1, 1983 netted $8 million for the renamed Cook Data Services.
Then the unthinkable happened. Just weeks after the offering, the Organization of Petroleum Exporting Countries slashed the price of oil. The impact on the oil industry--and Cook Data Services--was devastating. Overnight, clients couldn't pay their bills and wouldn't return phone calls. The company went from solidly profitable to a loser in a sick industry. As the oil industry tanked, so did the stock of Cook Data Services. Adding insult to injury, a shareholder lawsuit was filed accusing the company and directors of fraud for not warning investors that OPEC might cut prices. "We were incensed but that didn't make the lawsuit go away," Cook says. The suit was settled in 1984 for $1.5 million.
With no end in sight to the oil industry doldrums, Cook and Anderson hunted for other ways to deploy the company_s cash. One deal that showed promise was a company that used bar code tag technology to identify herd animals, hence the name Amtech for "animal management technology." But Cook and Anderson saw promise in applying it to other business uses like railcars and toll roads and funded it with $500,000 over the next two years. (Later, Amtech would become an exit for Anderson and Cook.) They were still scouting for opportunities when his ex-wife, Sandy Cook, suggested opening a video store.
What David Cook had needed was the right concept. And though Sandy Cook didn't have a business background, she intuitively sensed that if a small video store could do well, a bigger store would do even better because of the additional tapes that could be rented and the customers they would draw. The idea of a superstore also appealed to David Cook's ego--he didn't want to do anything small. As they developed other aspects of the concept, Cook found a site at Skillman and Northwest Highway in Dallas, in a free-standing section of a strip shopping center fronting the busy intersection. The site offered great visibility and potent demographics--lots of affluent young renters in apartments and townhouses. "I know Dallas well enough to know that the single best site in Dallas has got to be that intersection." It is still one of Blockbuster's most successful stores.
Cook approached a local video store chain about becoming a franchisee. He wanted to test the concept of a superstore and suggested the required franchise fees be waived because of his additional investment. When the owner balked, Cook offered to buy the company for $2 million. But the next day, the deal fell through when the owner demanded $4 million. This time, Cook balked. He couldn't see shelling out that much in shareholder money for a video rental chain with three company stores and some franchisees. They'd have to go through the learning curve themselves.
So Cook Data Services began a metamorphosis into a video rental chain. Sandy Cook researched titles, looking at 30,000 titles over six months before coming up with a basic inventory of 10,000 tapes organized around 30 categories. Meanwhile, David Cook locked up the site in June 1985. The next month, the company sold David P. Cook and Associates, its only operating subsidiary, to a group of investors, including members of management. Now Cook Data Systems was committed to the video business. Sandy designed the store's interior with bold blue and yellow colors, floor to ceiling windows, oak trim and bright lighting. She devised the torn-ticket logo and the name, Blockbuster. "I didn't like it at first, like the first hour," Cook remembers. "The more I said it, the better it sounded." The seeds for the company's later diversification were sown early: when the company changed its name in May 1986, Cook deliberately chose Blockbuster Entertainment Corp. rather than the more limiting Blockbuster Videos, because he could see the name could work for a host of company subsidiaries.
Some industry innovations that Blockbuster got credit for--like the "live" display meaning the movies were actually on the shelves--were simply a matter of practicality. There was simply no way to service a store with 8,000 videos in the old method of customers having to bring empty boxes to clerks to see if the movies were in stock. And unlike the industry norm, Blockbuster didn't charge a membership fee. Cook didn't want customers to not come to the store because they felt they had "invested" with another chain. Blockbuster's policy against renting X-rated films, which garnered pluses in the press and was later parlayed into its "America's Family Video Store" slogan, wasn't because of any moral high ground by David Cook, but rather because "while we don't care if people watch pornography, we just don't want to sell it to you." The timing was right as the video industry was shifting from adult renters to a large kid and family rental business. "A lot of families came to our store only--not because of the selection and not because of the long hours and not because of the convenient check-out and the three-day rentals--they came because they didn't mind their kids running around the store because they wouldn't see any garbage._
Other innovations, like the store's computer system, were key to its initial success. The system used a bar code scanner to read key data from each rental tape and from the member's card. Within seconds, the computer calculated the rental amount. (Initially, it was $3 for 3 nights per tape. Cook decided the company would eat the sales tax in order to speed checkout so clerks wouldn't have to make change.) Returned tapes were also run through the scanner and any rewind or late charges were added to the customer's account, which would be recalled and settled on the next transaction. The strong inventory control system detailed the number of times each tape was rented, generated a daily summary report by store, and held a wealth of data on the demographics of Blockbuster customers and what tapes they rented. It would be years before Blockbuster would start to mine this field to better manage its tapes and select inventory for stores. But it lent some depth to Blockbuster's "story" and was a point later burnished for the benefit of Wall Street and the media on occasion.
Everything that could go wrong with opening the first store did. Construction delays postponed the opening from August and organizing 8,000 video tapes the first time was a nightmare. Finally, by October 19, 1985, all was ready and the doors to the first Blockbuster video rental store opened. They had spent upwards of $800,000 to develop this first store, including the computer systems. That was a big chunk of change, and David Cook was nervous about the reception it would get. The first day was better than either of the Cooks could have imagined. Working behind the counter, David Cook could hear customers' comments as they wandered among the shelves lined with brightly colored movie boxes, displaying an entertainment selection never before available. Customers mobbed the membership counter and clutched three and four tapes in their hands--and they weren't leaving. A line formed outside to get in.
Among the throng of customers the second day was Scott Beck. It would be one of those chance meetings that changed destinies for both Cook and Beck. Customer number 91 in Store A would become Blockbuster's largest franchisee and play a pivotal role in the company's history and in the lives of David Cook and Wayne Huizenga.
Skeptics and Short-Sellers
After talking with David Cook, Scott and his father decided to invest. They formed a partnership and bought 9 percent of Blockbuster's stock over the next 60 days. That got the attention of Cook. But Beck saw more possibilities as a licensee and embarked on a two-month study of the industry. He visited other video rental chains, including then-major players such as Las Vegas-based Major Video, which would become a target of Wayne Huizenga's just two years later. But while Beck was pretty sure about going with Blockbuster, he made up his mind on New Year's Eve. As he'd learn later, New Year's Eve is one of the biggest video rental nights of the year. Beck stopped by the store to take a look. There in front of the store was a stretch limo and inside was David Cook, telling his girlfriend that she'd have to go to a party without him, that it was simply too busy for him to leave. Anyone with that type of commitment to the business, Beck thought, was the right person to go with.
In early 1986, Cook and Anderson were laying the groundwork for what they already were planning to be a major video rental chain, perhaps as many as 1,000 stores nationwide. They hired personnel, including executives for finance, operations and administration. They spent $3 million on a distribution center which Cook designed. The center took tapes from distributors, repackaged them in plastic cases, coded and packed them by categories. The system allowed an entire store inventory to be packed and shipped, down to the toilet paper for the restrooms. "The real story isn't the store," Cook says. "That's the end of the story. The real story was all the stuff behind the scenes that allowed us in eight hours to send a store out to Atlanta." Anticipating growth, but never dreaming of how much, Cook designed the distribution center so three stores could be loaded in 24 hours. That capacity would be key under the frenetic pace set by Huizenga later, in which a Blockbuster store would open every 17 hours.
With the computer systems and distribution center, Cook felt he had a jump on the industry. But he needed help expanding. "We could deliver a store a day easy, but we couldn't finance a store a day." To Cook, granting licenses to broad stretches of territory seemed the ticket. He didn't charge upfront licensing fees, but instead charged for services, such as site selection and royalties for the computer system. He and Anderson looked for deep-pocket investors who could bankroll the buildout. Huizenga would later criticize the license agreement as being too loose, but as Cook notes, those easy terms were needed to get investors to risk their money on a new concept. Cook approached the Sanchez family of San Antonio, which had struck a fortune in the gas business and had invested in Cook's original software company. The Sanchezes put up the money for territory including San Antonio and Cook and Anderson set up and managed the stores. Through his investment firm, Beck started selling limited partnerships and convinced two of the Waste Management "club," Peer Pederson and John Melk, to invest. On August 25, 1986, Beck opened his first franchise store at 10 a.m. in Marietta, Georgia. A store owned by Sanchez opened one hour later in San Antonio, central time.
Word of mouth and the stores themselves attracted other licensees, people like George Baker, former president of Kentucky Fried Chicken, Fred Montesi III, who had just sold his Memphis-based family-owned grocery store, the largest in the state, and was looking to invest in a new business. A San Antonio attorney, Raymond Schneider, walked into the Blockbuster store owned by the Sanchezes in September and became an instant convert. "I literally had dreams about that video store and thinking about how I could run it," he recalls. "I had a senior partnership in the second-largest law firm in San Antonio and making, in my experience then, a lot of money. I was so captivated I gave it all up." Schneider worked connections to raise money and within four months had snapped up licenses for much of Florida--another event that would lead Huizenga, who initially wanted a franchise in Florida, to invest in the parent company.
By now, the $8 million kitty held by the fledgling Blockbuster Entertainment Corp. had dwindled. Cook needed money to expand. A plan to meet with Ross Perot, the mercurial founder of Electronic Data Systems and investor, foundered. Preliminary talks with Cox Cable proved fruitless. Cook and Anderson decided it was time for another stock offering. Anderson knew Clinton Allen, a senior executive with Advest Inc. The Connecticut-based brokerage firm decided to handle the offering.
Blockbuster had a good "story" for Wall Street. The proliferation of video stores was a concern but the concept was fresh. Cook and Anderson were hoping the offering would net as much as $18 million after fees. But the stock market was queasy. Anderson watched with concern as the market weakened over the summer. And he and Cook also noted that the short position in Blockbuster's stock was growing.
So began the involvement of "short-sellers" with Blockbuster, a force that would dog Blockbuster and Huizenga for seven years and which Huizenga took delight in crushing whenever he could. Short-sellers are the yin to the yang of Wall Street. They're the pessimists, the ones betting that a company's prospects aren't as good as they seem, that the bubble of an "over-valued" stock will burst. Short-sellers essentially sell borrowed stock. If the stock price falls by the date they have to deliver, they can buy it at a lower price and pocket the difference. If the stock price rises, they have to buy the stock at a higher price and get "squeezed."
Then, in the world of Cook and Anderson, came an event nearly as catastrophic as OPEC cutting the price of oil. In the September 1, 1986 edition of Barron's, the well-read "Up & Down Wall Street" column questioned the Blockbuster concept and sneered that with the vast proliferation of video rental outlets, the last thing needed was yet another, even if it was a "Superstore" concept. Moreover, the article underscored the big fear: "Building a retail store and arranging to stock it with thousands of cassettes doesn't strike us as horrendously difficult. Any measure of significant success by Blockbuster doubtless would entice others to do likewise and we well could see the emergence of a chain of Box-Office Boffo Stores, slightly bigger than Blockbuster's, staying open slightly longer hours and with slightly more inventory. And Boffo would begat who knows how many others."
The negative article on top of a shaky market cratered Blockbuster's stock offering. Selling a smaller number of shares at a reduced price brought in just $4 million. "The Barron's story was the single changing point in my life," Cook says. The article set in motion a chain of events that would cause Cook and Anderson to lose control of Blockbuster and for Huizenga to take a fledgling video store chain and build it into a powerhouse that would prove the doubters wrong.
Huizenga Buys In
On a two-and-a-half hour flight back to Fort Lauderdale, Huizenga looked at the numbers, the projections, and the industry background Beck had given him. The more he looked, the better Blockbuster looked. It was a rental business and a service business, both of which Huizenga understood, and had plenty of cash flow, which he liked. But now he was in the role of a convert trying to sway the skeptics. His top lieutenant, Steve Berrard, didn't hide his dismay. "I did everything I could to defeat the premise that this was a real business," remembers Berrard. At one point, Berrard told Huizenga flat out, "We should not be doing this. This is not a good business for us. It can't be true. It's too good to be true and there are deals like this all over the place." Over breakfast at The Chemist Shop, a drugstore and coffee shop on Las Olas Boulevard, Huizenga tried out the idea on his two other assistants, Rick Rochon and Joe Burke. Neither said much, not as sure of their relationship with the boss as Berrard, but they made it clear they weren't enthused about this new venture. "Hell, if the numbers are half this good, it's worth a look," Huizenga told them.
On Thursday, February 5, he and Don Flynn, who still owned a house in Boca Raton and spent a good part of his time in Florida, flew to Dallas. Melk met them from Chicago. With Scott Beck as intermediary, David Cook and Ken Anderson showed Wayne around a few stores and visited the distribution center. Huizenga recognized the distribution center as key to the company's growth. He liked the systems and organization. Over dinner that night at the Energy Club at the top of a Dallas office tower, they discussed possibilities. Huizenga initially wanted to be a franchisee. But a good chunk of the territory in Florida was already licensed. So he decided instead to invest in the company. They hammered out the parameters for a deal.
Meanwhile, Anderson had done his own checking on Huizenga and Waste Management. "We actually had some concerns in the process of negotiating. The minute you hear "Waste Management" you think about the garbage business, and when you're in the garbage business, you think of the Mafia and we actually had some concerns about that." He was reassured by the fact that Merrill Lynch was Waste Management's investment banker, but he also checked with friends at Houston-based competitor Browning-Ferris. The word back was that "they_re tough and they're good, but they're clean." It wasn't the last time that Huizenga's background in the garbage business would raise questions in the video industry.
But the deal struck over dinner began to unravel the next day. The company didn't have directors and officers insurance, meaning the new directors with their sizable net worths could be personally liable. There were issues over the number of warrants that would be granted. The lawyers were insisting that more time had to pass for more due diligence before a change of control could take place. In truth, both sides were having a case of cold feet. "Anytime you're committing $18 million for something and you're talking from their side, you're nervous. You're saying hey, that was too easy, maybe there's something we don't see here," says Cook. "And from our side, we're saying I'm not sure we need these guys, they're pretty tough bastards."
Huizenga, Melk, and Flynn broke off the meeting. Huizenga flew back to Fort Lauderdale. He didn't need Cook, Anderson, or Blockbuster as much as they needed him--and he knew it. Sure enough, within hours, he got a call from one of the company's directors, Clinton Allen, asking if they could meet again. Both Beck and Allen had worked on Cook, convincing him that $18 million was too much money to let details stand in the way. The group chartered a Lear jet from Dallas and flew to Fort Lauderdale. They met Sunday at the offices of Huizenga Holdings, a gracious two-story Spanish-style building with a fountain and courtyard that seemed more suited to a hacienda than the soon-to-be headquarters to build a billion-dollar company. There, they worked out the parameters of the deal again. "I remember coming out of that negotiation thinking that Wayne was smart and one step ahead," says Clinton Allen. "That negotiation was us reacting to Wayne rather than him reacting to us. He does deals like a chess player. He's always two to three moves ahead of whomever he's dealing with."
Learning from his experience at Waste Management, Huizenga was going to make sure that the money and credibility his group was infusing were adequately compensated. The structure of the deal they made that day--plus the options Huizenga would earn later as chief executive and by all three as directors--would vault them from being mere millionaires to mega-millionaires. The group would invest $18.5 million in three stages for 1.2 million shares of Blockbuster stock, and would be granted warrants, or rights, to buy an additional 1.7 million shares, half at $17 and half at $21 a share. The deal gave Huizenga and his group 60 percent of Blockbuster_s stock and Cook and Anderson would give up control. They and the Becks would put their stock in a voting trust, to be voted the way Huizenga's group saw fit. Cook could sell, but Huizenga had control. "He's a tough, hard-nosed business guy, but that's okay, he was always fair," Cook remembers of those negotiations. "He was a solver. It's like he's got a goal and he tries to run around this way to it and if that doesn't work, he runs around the other way and he finally finds a way through, but, as long as he reaches his goal who the hell cares how he got there. But he always gets his goal." More than seven years after he ceded control to Huizenga, Cook got a call in the summer of 1994 as the fate of Blockbuster's merger with Viacom hung in the balance. The caller, a broker, wanted to know whether Cook thought the deal would fly. "I said the only thing I can tell you is that Wayne always gets his deals so that's what I would bet on."
On Tuesday, Huizenga and two of his lieutenants flew to Dallas to begin working with lawyers on the details. Huizenga was ready to fly back to Fort Lauderdale, leaving his assistants to finish the task before an announcement would be made. But word was leaking out about the new investment group and the stock began to trade at a heavy volume with a rising price. Beck, watching with concern, called Cook out of a barber's chair and sent an associate to head off Huizenga at the airport. With a fairness opinion and voting agreement worked out that Wednesday afternoon, they announced the deal.
As Huizenga was signing the final papers, he did something so characteristic that it still makes his friend Melk laugh. After putting down the pen from signing the papers, he looked up at Cook and asked who was the biggest competitor. "Major Video," Cook replied, citing a video rental company based in Las Vegas which had also embarked on a superstore concept. That night, reminicent of the pair's Waste Management days when they'd fly at night to get on with business first thing in the morning, Huizenga and Melk flew to Las Vegas just for a "get acquainted" meeting the next morning with Major Video founders Gary Moore and Hank Cartwright.
Huizenga would later court Major Video over more than a year and acquire it in what would be one of the most important but problematic deals in Blockbuster's history. But the seeds for that deal were already being sown the day he invested in Blockbuster. "Wayne is a relationship guy," marvels Clinton Allen. "Part of his genius is this. He's great at setting up an acquisition. He sets it up like an artist sets up a painting. Instead of picking up the phone and saying "I'm Huizenga and I want to buy you," he stopped in and visited them. Why did he do that? It's all part of the way he works. He gets to know them and when he comes back, it's not as an outsider but with some kind of personal relationship."
On Friday, February 13, when the Blockbuster agreements were all drawn up and the legal work done, Huizenga chartered a second Lear jet to bring his son, Wayne Jr., his father, Harry, Steve Berrard, Joe Burke, Rick Rochon, Don Smiley and other friends and associates to the closing. Even though Huizenga viewed Blockbuster as an investment, it was a pretty big deal even by his standards. They celebrated with bottles of Dom Perignon on the flight back home.
The celebration was short-lived, at least on the parts of Cook and Anderson. It didn't take long for friction to develop between the new controlling shareholders and entrepreneurial managers. Suggestions became directives which met with resistance and resentment. There was nothing "passive" about these investors. With Flynn still chief financial officer of Waste Management and Huizenga overseeing his collection of service companies, Melk became the liaison. Huizenga dispatched Rick Rochon to Dallas as well to become steeped in the financials. Melk set up an office in the exercise room off of Cook's office and started to learn about the business. Cook thought Melk arrogant, condescending and without a clue of what made video rental tick. Melk viewed Cook as a computer nerd and a neophyte in business.
Beyond personality clashes were deep differences on business fundamentals. Both the original management and the new investors recognized the same pressure: with nothing proprietary, Blockbuster's concept could be copied. But they responded to it very differently. To roll out the concept quickly, Cook wanted to concentrate on building company stores in the Dallas area and license everything else out, planning to buy the licensed stores back later for stock. "There's a concept out there that Wayne came in when there were just 19 stores, that this was a little bitty chain and he took it to some great heights. We might have had actually 19 open or something, but when he actually took over we had a whole lot more than that, and a whole lot more in development."
But to Huizenga, licensing gave away too much territory with too little oversight and control. It rubbed against his very grain of running a business. Huizenga took the licensing agreement home and read it. "I'd never read a licensing agreement in my life, and didn't know anything about franchising, so I wasn't trying to be an expert," he recalls. "I couldn't understand why in the heck we had that franchising thing worded the way it was worded. That was probably our first confrontation."
Licensed stores didn't contribute enough to cash flow and earnings to make much of an impression on Wall Street. "I was of the opinion that Wall Street had seen enough franchise companies," says Huizenga. "Franchise companies come and go every day. If you really want to do something, you have to build some mass. And the only way you are going to build mass is if you own these stores."
Repeatedly, Huizenga made this point with Cook. "Why should we let somebody else build these stores? Why don't we build them ourselves?"
"We don't have the money," Cook answered.
"Then we'll get the money. We'll put in more money if we have to,_ Huizenga replied. "But why let somebody else run these stores? These stores are gonna do terrific."
"We don't want to do that. We're just going to build up a lot of debt and we're going to get in over our heads and why should we have all that debt?" Cook believed the only thing that could make Blockbuster stumble was debt and he wasn't willing to borrow until he felt the company's cash flow could handle the payments. But Huizenga and Melk were adamant and pressured Cook to stop the licensing program.
Cook wasn't the only one chafing under the new investors' demands. Anderson's conservative financial bent was uncomfortable with the aggressiveness of Huizenga's group. "I was skeptical," Anderson says. "They claimed they were gonna get that stock up to $100 a share in two years."
There was also friction over Huizenga"s strategy of acquisitions. Huizenga knew he couldn't quite duplicate the rapid-fire deal-making machine that had propelled Waste Management into an industry powerhouse. There were only a few chains worth acquiring, but he was intent on buying mass where he could.
The first Blockbuster acquisition target was St. Louis-based Movies-To-Go, a chain run by Jim Ellis and his three brothers. As a college student, Ellis had hooked up with a top executive at General Dyanmics Corp. who had provided backing for his first video store, which opened in June 1981. One of the pioneers in the business, Ellis was also one of the most aggressive, growing off of cash flow to 29 stores by early 1987, mostly in St. Louis and Chicago. Movies-To-Go was the second-largest privately held video store chain (not counting franchise stores) in the country at the time.
Acquiring Movies-To-Go would accomplish three things for Huizenga: it would give Blockbuster critical mass in an area, it would give the company needed management depth so long as the Ellis brothers signed on, and most important, it would give Blockbuster immediate profits. Blockbuster had lost $3 million in 1986 and this acquisition would help change that picture. Finally, a more minor consideration, the deal would remove a competitive threat that was encroaching on Scott Beck's territory in Chicago.
John Melk made the introduction, meeting Ellis in the TWA Ambassadors Club in St. Louis and then inviting him to Dallas. But it was Don Flynn who headed up the negotiations. Ellis remembers being polite, but feeling insulted by the first offer, floated by Melk, then meeting with Flynn four or five times before the deal got done. Young, confident, and with an operation at that point bigger than Blockbuster, Ellis knew these guys would be fierce competitors, but that didn't mean he was going to capitulate, either. He'd been advised by lawyers and friends not to do the deal. "We didn't need them. He needed us and maybe Wayne had never been in that position before," Ellis says. "Wayne was under the gun. He had $3 million in losses in 1986 and he had to produce results."
There had been virtually no real acquisitions in the video industry, so there was no benchmark. "It was basically our price and their terms," Ellis remembers. Huizenga flew up on a Saturday with his father, Harry (who walked the store off, measuring square footage) and Joe Burke, who did some number crunching. Huizenga wasn't happy about the price. But the deal closed in May 1987, valued at roughly $17 million in cash, stock, and warrants. "There was no question that Wayne made it clear that he was not happy with the final outcome of our deal," Ellis recalls. Indeed, after many years and acquisitions within the industry, Ellis was still on record as garnering a top price for a video store chain. Flynn heard grief for years about the Movies-To-Go deal. "The company really needed an acquisition to give it some more substance before it could go out and do other things," Flynn says. "That wasn't a bad deal, I don't think. Maybe it wasn't the greatest deal in the world."
But tough negotiator Huizenga doesn't like to have the tables turned and Ellis paid for driving a hard bargain. After working for Blockbuster for nearly two-and-a-half years to build the company, Ellis decided he'd had enough and resigned in January 1990. But only half his options--rights to buy stock at a favorable price, the key to Blockbuster's compensation plan--had become vested. Although other executives would be granted consulting contracts and other arrangements to continue allowing options to become exercisable, Huizenga felt no such obligation to Ellis. A week after he'd announced his intentions to leave, Ellis checked with Huizenga about the options and was told he wasn't entitled to any since he'd already resigned. He was forced to forfeit half his options, which cost millions.
The incident would be noted by other Blockbuster executives as an example of how tough Huizenga could be. Ellis didn't volunteer information about the incident, but does confirm it. "Wayne felt I was paid my due," Ellis says. "To my knowledge, I was singled out and I didn't think it was fair." Ellis says he's never brought it up to Huizenga, who is a neighbor in Fort Lauderdale. "It's never come up between us," he says. "He knows the score and I know the score."
While the Movies-To-Go deal was being negotiated, friction between the groups at Blockbuster was growing more pronounced. Huizenga knew tensions were rising. Cook complains that Melk was constantly giving suggestions that didn"t display any understanding for the industry, at one point suggesting that the stores sell Godiva chocolates since their upscale audiences were the same, a notion that struck Cook as absurd. At one particularly contentious meeting, Don Flynn suggested that store managers had to be responsible for budgets. Cook was furious. The only thing store managers had to manage was personnel, that was the way he had designed it. "Why don't you take enough time to at least see what we do before you tell us how to do it," he told Flynn. "It was a very bad meeting," Cook says later. "We all kind of broke out of there and went to our corners." For his part, Huizenga keenly watched Cook's reaction when Flynn or Melk spoke. This young executive was proving to be quite problematic.
For Anderson, the Movies-To-Go acquisition was the last straw. He was convinced Huizenga was going to cheapen the Blockbuster concept by acquiring these smaller store chains. Meanwhile, the tag technology company, Amtech, was in need of more capital. Huizenga refused to fund it any further and agreed to sell it to Cook and Anderson for what Blockbuster had invested in it, about $1.5 million. Anderson resigned in mid-March. Cook stayed on at Blockbuster as chairman for another month. But finally, Cook had had enough.
The phone call came on a Sunday night in April 1987. It was nearly p.m. on what had been a quiet evening of just watching television with Marti, the rare relaxing kind of time Huizenga had missed during his years of shuttling to Chicago during his Waste Management days and were becoming more infrequent as he geared up for his next venture. It was a tranquil evening, or at least as tranquil as it got for Huizenga and his perpetual deal-making machine. Even now, as he sat in one of the thickly-upholstered chairs placed between the sets of French doors, he had briefcases open on the tile floor around him. That tranquillity would be shattered with this phone call, which would thrust him back into the limelight and the pressure cooker of running a public company. It would prompt him to again court Wall Street into believing a vision. And it would challenge him to draw on the experience, talent--and some of the bare knuckles tactics--honed in building Waste Management to grow a company past the $1 billion mark in less than half the time it'd taken to get Waste Management there.
But now, all Huizenga knew was that he had a problem. An $18 million dollar problem. The caller was David Cook. "You're the chairman," Cook told him. "I want out." He was leaving to join Ken Anderson at Amtech. Huizenga had little appreciation for the technology, but Cook and Anderson parlayed it into a successful public company.
Huizenga tried to convince Cook to stay. Huizenga had his own stable of service companies--pest control, lawn care and bottled water--that he was weaving together and preparing to take public. He was in the midst of talking with underwriters about Service USA. He didn't need this headache with Blockbuster now.
But Cook was adamant. He was convinced that Huizenga, Melk, and Flynn were going to cheapen the Blockbuster concept by acquiring other video rental chains and saddle the company with debt in their hell-bent drive to expand by building company stores. He'd learned the hard way about letting someone else control his business and wasn't about to repeat the mistake. Blockbuster's stock had already more than doubled since Huizenga and his group had bought into the company. Cook was going to cash out while he could.
Huizenga hung up the phone, then quickly dialed the home of Steve Berrard. He'd already earned Huizenga's trust by managing his collection of private companies and had proven a quick learner in the Huizenga school of dealmaking. Now he'd have a new role as Huizenga's chief lieutenant in building Blockbuster into a $2.6 billion public company--and in seven years, would land a spot as a top executive of one of the largest entertainment companies in the world. Huizenga told Berrard to pack a suitcase. "Get ready," he told Berrard. "We're going to Dallas."
* * * *
Huizenga had hoped to find other management before Cook had exited. Now he had no choice. He had to take over as chairman. He hoped to make the transition as smooth as possible. Huizenga asked Clinton Allen to stay on as a director. Allen readily agreed. A big, jovial bear of a man, who loves fishing, Allen would come to count Huizenga as a friend. (His New England accent still puts an "r" at the end of the name, pronouncing it "High-zinger.")
Huizenga also tried convincing Cook to stay on the board as a director and founder. "David, why don't you be like Colonel Saunders of Kentucky Fried Chicken? You'll always be known as the founder of the company." Cook refused. "I'm getting out," he said repeatedly. Years later, Cook readily admits that Blockbuster would never have grown to the scope it did under his leadership. "I suspect we'd be at 2,500 stores right now. I would have never gone out and acquired the chains he did. I would never have done the job he did in acquiring market share. I wouldn't have done it. Wayne has a history and it's probably as successful as anybody in business of acquiring companies. He's a magician. I mean he is the best there is at that. He did a far better job of expanding Blockbuster than I ever would have."
On April 23, 1987 the that Blockbuster posted its first profitable quarter of $397,000, Cook was gone. Before he left, he held a meeting to brief employees about the change of management. It was awkward and uncomfortable, particularly for those loyal to Cook, but also for Huizenga. "I'm leaving," Cook told them. "This guy's your new chairman. His name is Wayne."
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