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Icahn, Antioco Opine on Blockbuster Fall

21 Mar, 2011 By: Erik Gruenwedel

Corporate infighting between former CEO John Antioco and activist investor Carl Icahn — not Netflix or rental kiosks — contributed to an eroding foundation that ultimately resulted in Blockbuster filing for bankruptcy and putting itself up for auction, according to a new report.

In the April issue of Harvard Business Review, Antioco and Icahn express surprising mutual respect in separate, self-serving, essays characterizing events they believe contributed to the demise of largest movie rental chain in the world.

In 2004, Icahn bought 10 million shares of Blockbuster stock — a stake the irascible investor used to assert influence over the rental chain’s operations. Indeed, Icahn proceeded to engage in a loud proxy fight (well documented in Home Media Magazine) to gain seats on Blockbuster’s board (which he did).

Antioco said Icahn’s handpicked board members wanted Blockbuster to begin selling greeting cards, carrying adult movies and subcontracting with Barnes & Noble for a book department, among other changes.

“When directors with preconceived notions are determined to serve as obstacles to management’s plans, it’s hard to find a formula for success,” he wrote.

The CEO said Blockbuster attempted to jump into the online business in a “big way” with a ($200 million) strategy that coincided with the reduction of late fees — a significant ($200 million) source of incremental revenue. He said the moves would put Blockbuster back on the path to growth.

“We presented data demonstrating that franchisees that had dropped late fees were outperforming those that retained them, but [the board] remained unmoved,” he wrote. “They wanted us to reinstate late fees, which would have been a disaster.”

The investment community viewed the decisions as a $400 million hit. At the same time, Blockbuster had entered into a (unsuccessful) bidding war with Movie Gallery to acquire Hollywood Video.

“Our goal was to orchestrate an orderly downsizing of [Gallery's] store-based business and take on its customers as our own while we also focused on developing alternative movie-delivery methods,” Antioco wrote. “I firmly believe that if our online strategy had not been essentially abandoned, Blockbuster Online would have 10 million subscribers today, and we’d be rivaling Netflix for the leadership position in the Internet downloading business.”

He said Icahn used the failed Gallery acquisition and elimination of late fees to mount a challenge to his leadership.

“I was about as prepared for such a fight as I could be without ever having gone through one,” Antioco wrote, adding the ensuing litany of lawyers, bankers and proxy solicitors added to the tumult.

“The reality is, we’d just been spun off from Viacom and most of our stock was held by hedge funds,” he wrote. “They were all in for a quick pop, and Icahn is well known in that community. We were probably doomed from the start.”

In his essay, Icahn said Antioco seemed to be a good guy and capable executive, albeit with a questionable work ethic.

“His heart didn’t seem to be in it,” Icahn wrote.

Though describing Icahn as intellectually engaging and quite the storyteller, Antioco said the investor was driven by a “sheer force of will” to mandate his positions on the board — despite never attending a single meeting at Blockbuster’s corporate headquarters in Dallas.

Matters came to a head in 2006 when Icahn believed Antioco was overcompensated (the CEO felt he deserved millions in bonuses), and became enraged when details of his employment contract mandated a $50 million payout in the advent of an executive change in control at Blockbuster. Antioco left in the summer of 2007.

Icahn said Antioco’s compensation was the “nail in the coffin.” He said the Blockbuster proxy fight was one of the easiest in his career, underscoring Antioco’s unpopularity among shareholders.

“His departure wasn’t just my wish — the board was not unhappy when he left,” Icahn wrote.

The investor did laud Antioco for launching Total Access, a program (subsequently ignored by successor Jim Keyes) that allowed members to rent online and return in stores for new product.

“Over time it might have helped Blockbuster fend off Netflix,” Icahn wrote. “To this day I don’t know what would have happened if we’d avoided the big blowup over Antioco’s bonus and he’d continued growing Total Access.”

Regardless, Icahn said excessive executive compensation has become unsustainable in corporate America with little accountability for CEOs by indifferent board members. Calling Blockbuster the “worst” investment he’s ever made, Icahn said Keyes’ limited digital insight hurt the company going forward.

Indeed, Keyes, a former CEO of 7-Eleven, believed Blockbuster’s multifaceted distribution network (kiosks, by-mail and digital) should be store-based.

“Maybe the board did make a mistake in picking Keyes as Antioco’s successor,” he wrote.

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