It happened again late last week.
Let me set the scene.
It becomes public that Regent, the small market radio group, failed to make a loan payment by their December 31st deadline.
But wait – there’s more.
CEO Bill Stakelin blows off the lenders because they have a bigger concern – that they will have to take his money-losing company back. That -- in and of itself -- shows you what money people think of the radio industry.
Keep my investment.
I don’t want to take you to bankruptcy court.
Unless …
Unless ... I get to dictate the terms.
That’s what has happened in the Citadel prepackaged bankruptcy and the impending NextMedia implosions. The clueless lenders and their losing management teams get to negotiate the terms of a prepackaged deal that they can take to a bankruptcy judge and, well – start all over.
Now here’s where it gets sticky.
Stakelin and Regent CFO Tony Vasconcellos suddenly get the board to extend their contracts and give them a raise -- and I do mean suddenly.
That’s Bill Stakelin, the guy who made all the operating decisions that didn’t work and Tony Vasconcellos, the guy who made all the money decisions that, -- well, you get the idea.
Look at the timing – only a snake in the grass could appreciate the art of this deal.
December 31 – Regent doesn’t make its loan payments. Period.
December 31 – The Regent board finds it fit to rehire their two top guns. Period.
Coincidence?
Nah.
It’s how the game is played.
So while employees are getting let go and taking pay cuts – adding more duties, these two screw ups get a new deal.
Stakelin renews for a base salary of $366,057 a year, with an annual escalator hitched to the Consumer Price Index. A bonus clause: eligible for a Senior Management Plan Bonus of up to 80% of the base salary ($292,846) contingent on hitting financial targets.
And there’s still more.
Stakelin can buy a lot of cigars with the 2010 Special Bonus Plan he is also eligible for.
Plus the usual perks – four weeks of paid vacation (with no forced furloughs, I'll bet), insurance, company car (presumably not a Kia) and one other tiny weeny perk --
The company pays their taxes.
Folks, I’m not making this up.
In effect, Stakelin and Vasconcellos get to have the honeymoon before the wedding – and remember, the wedding is a happy event for them called prepackaged bankruptcy.
Now you may read in the happy talk press that this is just business, but it’s monkey business to me.
So why?
1. Stakelin has no choice but to file for bankruptcy so you’d think he has to roll over and play dead to his lenders. No way. Stakelin can make it miserable for the lenders. He can drag a bankruptcy proceeding out. So by stealing a midnight deal, the lenders get the company the way they want it for a small price – the managers who took the company down.
2. At the heart of it all, the lenders don’t want the equity back. They don’t want to be in the radio business and certainly don’t want to operate the assets. And yes, they plan to sell the pieces when the time is right for whatever they can – presumably a profit. Not bad since they are also writing down the loans that never got repaid. Mel Karmazin had it right. You notice he never sold anything when he ran Infinity because he always told the Street that it was worth much more than it probably was and he didn’t want to be proven wrong. The Regent guys are going to be proven wrong.
3. If you haven’t already noticed, the country is in a big banking crisis. Nothing has been done to fix it. No real oversight. Loose controls. The entire economic foundation of business is in trouble and owning anything is going to be a challenge if I am correct.
One money person told me, “Jerry, the very thing you don’t like about all these radio cutbacks, lenders love”. He said they love it when guys like Lew Dickey come down hard because that’s what they want.
Jason Zweig wrote a fascinating piece in The Wall Street Journal recently about why replacing failed CEOs isn’t always the solution either.
He quoted economist Antoinette Schoar of MIT’s Sloan School of Management who has studied the effects of hundreds of management changes. The question: “If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable?”
Roughly 60% of the time.
Better than not doing anything but not a slam dunk.
Zweig says, “The real force in corporate performance isn’t the boss, but regression to the mean: Periods of good returns followed by poor results and vice versa. High returns attract fierce new competition, driving down future profits; low returns leave the survivors with fewer rivals, leading to better results down the road.”
So, it’s not about what you and I want it to be about – competence, fairness, rewards for a job well done, or excellent work environments.
It’s a game that the bank gets to play -- where failure is rewarded with more money and new contracts as long as the bank eventually comes away with what it wants – which is – the real estate.
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