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Gemstar Wars: Murdoch Strikes Back


It was a shotgun marriage, arranged following a hostile takeover, lawsuits, and threats. That was back in 1998, when News Corp. (NWS) Chairman Rupert Murdoch coveted the patents held by tiny Gemstar International. He launched a $2.8 billion takeover to buy the company, headed by Henry C. Yuen, a onetime math professor whose patents put him at the forefront of the emerging business of creating onscreen program guides.

At the time, Murdoch backed down, merging his TV Guide magazine with Gemstar to give the 56-year-old Hong Kong native a company that had $1.4 billion in sales by 2001. Now, though, this marriage looks headed for divorce. In recent weeks, sources in both companies agree, Murdoch has been pushing for Yuen to leave the company he founded in 1986. Murdoch--whose News Corp. owns a 43% stake in Gemstar-TV Guide International Inc.--put heat on Yuen over one top executive, installed another from News Corp.'s Fox TV unit to help restructure Gemstar, and has taken a stronger role in overseeing the company. Murdoch's aim, say those close to the media mogul, is to force Yuen out three years before the contract he signed in 2000 expires.

News Corp. and Gemstar executives wouldn't comment on intercompany relationships. But Murdoch's unhappiness is clear. Gemstar "is a real disappointment," he said during a May 14 conference call, in which he announced a $4.2 billion News Corp. writedown of its Gemstar investment. "We are taking a much more active role in preserving the value of this powerful asset."

Gemstar's assets are some 200 U.S. patents, including those that allow cable- and satellite-TV operators to put program listings on a screen. Yuen has been trying to launch a channel that also delivers advertising and shopping. But TV Guide's circulation has fallen to 9 million, from 10 million a year ago, and cable operators have been slow to roll out the programming guides.

And Gemstar's problems are piling up. A case before the U.S. International Trade Commission could invalidate some key Gemstar patents. A decision is expected by June 21. In April, Gemstar also announced that it had recorded as revenue $107.6 million in license fees from set-top box maker Scientific-Atlanta Inc. that it hasn't collected, pending a lawsuit between the two companies. It also said it had recorded an additional $20 million in ad sales from a sports service but neglected to disclose that the ad purchase came from money the service got for selling patents to Gemstar. The company says its outside auditors, KPMG LLP, approved the accounting. But sources say Murdoch and News Corp. CFO David DeVoe made Yuen disclose it when they learned of it, and bolster Gemstar's accounting department. The result: Gemstar shares, at $76 when the merger closed, now trade below $10.

Murdoch also pushed Yuen to rein in co-President Peter C. Boylan III. A tough negotiator, Boylan had stormy relations with cable operators, whom Gemstar needs to roll out the TV Guide Interactive channel. Boylan was replaced with 36-year-old Jeffrey Shell, a onetime investment banker who had been running Fox's cable operations. "We have repair work ahead of us," Shell conceded in a recent call to investors. Boylan, now running a new interactive-TV company for dealmaker John Malone, said he resigned to "spend more time with my family and to embark on new challenges."

Murdoch, who joined the Gemstar board late last year, along with his son Laughlin, News Corp.'s deputy chief operating officer, intends to keep the pressure on. But Yuen, who studied martial arts in high school, is known for waging fierce legal battles to protect his patents. He also still owns 8% of the company. Moreover, he has the right to name half of Gemstar's 12-person board and can cast the tie-breaker. Yet Murdoch came on strong at a tense Gemstar board meeting in May and isn't likely to ease up. Nor will Yuen. Gemstar shareholders, meanwhile, can do little more than watch as this unhappy corporate marriage winds down. By Ronald Grover in Los Angeles


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