Published: Feb 08, 2006 in Knowledge@Emory
In March 2005, Time Warner subsidiary Time Inc. bought the remaining interest in Essence Communications, owners of Essence Magazine, for a hefty, though secret, sum. (Initial reports indicate that the deal may have been valued at $170 million.) As a respected African-American publication and a household name, Essence Magazine became an attractive acquisition target for a mainstream media conglomerate. No deal seemed to indicate the power of the African-American brand better than the sale of Black Entertainment Television (BET) in 2000 to media giant Viacom for the purchase price of $3 billion. The two deals took two established companies targeting the African-American consumer out of the hands of black ownership and control and placed it firmly under the aegis and ownership of shareholder-driven conglomerates.
According to Peter Roberts, an associate professor of organization and management at Emory University’s Goizueta Business School, the success of the two companies indicates there is competitive advantage in being “cultural entrepreneurs.” He likens their value to that of Ben & Jerry’s Ice Cream, noting that “these niche offerings tap into a certain target audience and into a certain skills set. As that audience grew, larger companies found these firms attractive for acquisition. There is a value to the larger company to play in a number of markets, and to have subsidiaries that are complimentary, though different, in their approach.”
Jagdish Sheth, a professor of marketing at Goizueta and a corporate strategist, adds, “There is significant value in these brands and the loyalty of their customers. The niche company understands a specific distribution system, and the larger purchasing company may not have knowledge or access to it. Additionally, these niche companies generally have strong R&D divisions with scientists or marketers that think differently and can change the paradigm.”
But even with the acquisition of a successful enterprise, the blending of two companies doesn’t always have to be a successful marriage. Says Sheth, “The future success of a company like Essence Communications depends on maintaining the company as an independent entity, with the parent operating as a multibranded business. That’s the most successful path.”
Russell Coff, an associate professor of organization and management at Goizueta, adds, “Microsoft might purchase a company and slap the name on it. But here, the difference is clear. If you’re buying a company that is targeting the African-American consumer, and it has an established name and brand, that identity needs to be maintained to keep credibility with the target consumer. Here, the parent company can provide resources, but their name really doesn’t always help. The key is to manage a portfolio of brands and to create a high profile PR campaign that demonstrates that the brand is one people have grown to love and that it will continue to be the one that they have trusted.”
Merger-mania and the development of large industry conglomerates appear to be the true catalyst for change, and African-American owned businesses are certainly not immune to the industry trends. William Sharp, an adjunct professor of advertising at Goizueta and an advertising industry entrepreneur, believes that what was once considered a large and viable African-American owned advertising agency is now often perceived as medium or even small and potentially vulnerable to acquisition. He adds that merging with an industry behemoth can sometimes be the best way for a small business to insure its long-term existence, especially in the face of increasing competition from these same mammoth player.
Says Sharp, “This industry has experienced a spate of major acquisitions and consolidations during recent decades. The result? Just five advertising holding companies in the U.S.—IPG, WPP, Omnicom Group, Publicis Groupe and Havas—which account for upwards of 75% of the 300 billion dollar ad industry’s business.” The consolidation affects black-owned firms as well, with advertising holding companies now sitting on a significant stake in some of the industries largest African-American-owned advertising businesses. Sharp continues, “In 1999, Publicis Groupe bought a 49% stake in Burrell Communications Group. In 2000, WPP acquired a 49% ownership in UniWorld.”
The designer clothing industry has seen its share of consolidation as well, and well-known African-American owned and targeted companies are hot prospects for larger industry players. For instance, in 2004, Kellwood Company bought African-American owned Phat Fashions, producers of Phat Farm and Baby Phat designer clothing lines. (Kellwood owns other well-known lines, including Calvin Klein Women’s Sportswear, Briggs, Liz Claiborne Dresses and Suits, and XOXO.) Sharp adds, “There’s considerable consolidation and acquisition and all of it appears to be good ways for large companies to thrive, and for smaller African-American businesses to escape demise with their identity, credibility, and target consumer base intact.”
The story is a bit different for Black Entertainment Television (BET), a publicly traded company at the time of the Viacom deal. Once a company gets to a significant size, like BET, where deep pockets and additional distribution channels are demanded, then a sale to the largest industry player, in this case a well-positioned media conglomerate like Viacom, might not be the obvious choice. It might be the best choice—a strategic alignment expected in the industry.
However, a number of other companies targeting the black consumer, despite their size and high profile, remain firmly in the hands of African-American ownership. Despite the death of company founder John H. Johnson in August 2005, the management of Johnson Publishing Company, indicates that the company will remain under family control. Johnson Publishing Company produces and owns Ebony Magazine, Fashion Fair Cosmetics and Jet Magazine. LaTrina Blair, spokesperson for the company, notes, “Our president and CEO Linda Johnson Rice is dedicated and committed to continuing the phenomenal legacy her father, John H. Johnson, began sixty years ago. Johnson Publishing Company will remain a private, family-owned business.” Blair sees black ownership as a key to reaching the black consumer, noting, “It is important to preserve our voice and to be able to tell our own stories as much as possible.”
On January 5, 2006, Black Enterprise Magazine founder Earl Graves Sr. passed the title of CEO on to his son, Earl “Butch” Graves Jr. (Earl Graves Sr. remains as chairman and publisher.) The family-owned and operated company Earl Graves Ltd. includes publishing, investment funding, and business services operations. Alfred Edmond Jr., senior vice president and editor-in-chief of Black Enterprise Magazine, believes the reason behind the Essence Magazine sale and others like it could be the issue of succession. He notes, “Earl Graves, our founder, has prepared his three sons, and the people at Johnson Publishing groomed the daughter to take over.” For a majority family-owned enterprise beholding to a smaller number of shareholders, and with family members prepared to take over the boardroom, the decision to sell becomes a more remote thought.
Without heirs apparent, other African-American executives are being creative in making sure black leadership and control remains in place after their retirement. In June 2005, Burrell Communications founder and CEO Thomas J. Burrell passed on majority ownership and leadership of his company to African-American executives who had worked with him for some time. Adds Edmond, “This is such a new issue for African-American owned businesses—to even become businesses of such a size. Previous generations of African-Americans weren’t in this game, and so this is a very new issue to confront.” Still, Edmond understands why businesses such as BET and Essence Communications become targets for acquisition. “Part of the bargaining chip is that we have built substantial businesses with maximum value,” he notes. “There is credibility in the community. Many firms see the advantage of buying into the market instead of building up a brand from scratch.”
Additionally, says Edmond, black entrepreneurs are actively and intelligently responding to the corporate model. He notes that BET founder Robert Johnson followed the Wall Street model to a tee. After building the brand, Johnson took the company public in 1991. Says Edmond, “Robert Johnson was never shy about his direction. He said he wanted to build a business to generate maximum shareholder value. He did that. We, as African Americans, are getting to level of ‘maximum entrepreneurship,’ seeing ourselves as going beyond the one field.” Now, Robert Johnson heads up and owns the RLJ Companies, acting as a respected corporate player and strategist. The RLJ Companies own the NBA’s Charlotte Bobcats and the WNBA Sting sports teams, in addition to real estate investment and development, hotel, and private equity funding operations. Edmond notes, “Johnson can now buy and sell whatever he sees as valuable in the marketplace.”
But even with all of the money exchanging hands and the significant value garnered in these black-owned businesses, many in the press, and others in the African-American community, still wonder if the loss of African-American ownership of these companies might somehow affect their approach to the black consumer. Says Edmond, “We sometimes need to separate the emotional attachment from the process and make sure that we are making decisions based on economic sense. But it’s obvious that the African-American community has an emotional attachment to certain brands—Motown, for one, or certain hair care companies that they know and respect.”
In 1988, MCA and Boston Ventures bought Motown from founder and record industry legend Berry Gordy for a tidy sum reported at $61 million. (Universal Music Group now owns the Motown label.) In 1993, drug maker Ivax Corporation bought established black hair care company Johnson Products, creators of the Ultra Sheen cosmetics and hair care line. In 1998, cosmetics behemoth L’Oréal purchased Soft Sheen, another black-owned and targeted hair care company. Interestingly, L’Oréal also owned Johnson Products for a brief period in 2000, until the U.S. Department of Justice intervened. (Ivax sold Johnson Products to Carson Inc. in 1998, and Carson sold it to L’Oréal in 2000. After antitrust allegations, L’Oréal sold a large portion and a number of product lines of Johnson Products to hair and cosmetics giant Wella AG that same year.)
Continuity in management and creative direction can certainly aid the transition and the future success of the brand. Though BET was sold in 2000, Robert Johnson finally left the post of CEO in June 2005 and as company chairman in January 2006. Phat Fashions retains founder and hip-hop mogul Russell Simmons and his wife Kimora Lee Simmons in management and creative positions. Essence Magazine leadership is a mix of the new guard from Time Inc. and many of the individuals from prior to the sale. However, Black Enterprise Magazine has reported on rumors of disagreements at Essence Magazine, since the Time Inc. takeover. Of course, the true test of success, as cliché as it might sound, will play out over time and at the cash registers.
