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How to book huge profits in just fourteen months! The Warner Music Group IPO

This is Celia Hirschman with On the Beat on KCRW.

They were selling Warner Music again today, down on the New York Stock Exchange. It was just a year ago, the Warner Music Group was up for sale. Edgar Bronfman, Jr. and a team of private equity investors, including Thomas H. Lee, quickly bought up the company. Now, 14 months later, the same owners have agreed to sell stock in an initial public offering. The stock will yield them an immediate return on their investment, thereby reducing their financial risk, without losing a majority interest. In essence, they are flipping the company to the public, while still maintaining control.

The Warner Music Group was sold for $2.6 billion in March 2004 to Bronfman and his financial teams. They immediately dropped many of the artists, laid of hundreds of staff members and cut their operational budgets into a fraction of what was. Once they were able to secure their future with a new financial strategy, they set about taking the company public. First item -- they gave $26 million in bonuses to key executives.

But unfortunately, all is not well in wonderland.

Superstar and key Warner Music band Linkin Park have come out fighting against the new IPO. Linkin Park is unhappy with the fact that these guys are making a killing in the quick flip, without offering much to the bands that helped get them there. In a sad twist of irony, Warner executives, unaware of Linkin Park's animas, asked the band if they might perform at the New York Stock Exchange for today's opening. The band responded with a very loud no in the press, asking instead to be released from their recording contract. Linkin Park is not going to sit down and play nice.

The record business is notorious for amplified public blow ups. Unfortunately for the Warner Music Group, this one comes at a particularly volatile time. In Wall Street parlance, we are now in, what is called the quiet period. That's the period of time around the IPO where the key financial players affiliated with the deal are seriously restricted from commenting publicly on the business of Warner Music Group.

Originally, the Warner investors were hoping for an initial share stock price of $22 to $24 a share. With all the negative press about the IPO, they chose to cut their stock price to $17 at the open. Quickly, the stock moved downwards to the low $16 range.

Truth be told, an IPO does not indicate that a business is well run or poorly managed. The Wall Street fact is that ultimate justice can and will be had on the floor of the New York Stock Exchange, and the public will have a chance to vote on the results 5 days a week.

But regardless of the wisdom of the financial wizards, it does seem uncommonly fast to sell a company only 14 months after you bought it. That is, unless of course, you don't believe you'll get your money out any other way. In my opinion, the money guys are headed for the exits (and taking much much of their investment with them). This does not make for better management.

Taking all of this into account, I have only one helpful suggestion. Caveat Emptor -- or in other words, buyer beware!

This is Celia Hirschman for On the Beat on KCRW.

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