The Deal That Never Ends –

In what could be considered the ultimate game of hot potato, publishing giant Ziff-Davis was bought out multiple times in the 1990s, most recently in 1999 by Willis Stein & Partners. Ziff-Davis certainly isn’t the first company to move from one buyout firm to another, but its journey is as representative of the last decade’s buyout market as KKR’s LBO of RJR Nabisco is of the 1980s.

Of course, LBOs earned a negative stigma in the 1980s largely due to the steep cost-cutting measures LBO shops employed after buying out what were often troubled companies. Involvement in the day-to-day operations of a portfolio company was kept to a minimum. But that changed drastically throughout the 1990s, when in an effort to compete with well-capitalized corporate buyers, and with each other, LBO firms increasingly became more proactive and strategic by bringing in operations people, for example.

Ziff-Davis, with one arm in publishing – with a focus on computer titles – and the other in technology, embodied what made an old company a desirable investment in the 1990s. That it struggled throughout, and continues to struggle, after changing ownership, is partly a reflection of the grotesque slump in advertising sales, but also due to the overall fickleness of the marketplace.

“It’s easy now with hindsight to see a thing you maybe couldn’t see with foresight,” says Avy Stein, co-founder and managing partner of Willis Stein in Chicago. “And if you look over what Ziff-Davis was and what it needs to be going forward to be the preeminent player, they’re two very different things.”

The Current Ownership

In late 1999, Willis Stein bought the Ziff-Davis name and most of its publications, including PC Magazine, PC Computing and PC Week, for $780 million. Stein says his firm and other unidentified investors paid about $300 million in cash for their majority stake in Ziff.

“Back in the decade, in the 90s,” Stein says, “the growth of technology and the thirst for information about technology was insatiable. The way value was created at Ziff-Davis was by building more and more legs faster and maybe not with efficiency. Even the old Ziff-Davis, in the Bill Ziff days, probably sacrificed efficiency and profitability for the sake of growth, market share and being the dominant player in a fast, fast growing market.”

But Willis Stein is only one of several owners that thought Ziff-Davis would bring them riches.

Founded by William Ziff in 1927, Ziff-Davis published hobby-focused magazines such as Popular Boating, Popular Photography and Backpacker, all of which the company sold in the 1980s to move into computer titles. The company, now the largest technology and Internet magazine publisher and the sixth-largest magazine publisher in the U.S., was later sold four times in less than six years. In October 1994, William Ziff Jr. sold his father’s company to LBO firm Forstmann Little & Co. for $1.4 billion. A year later, Japan’s Softbank Corp. paid Forstmann $2.1 billion for the company, and Ziff went public in April 1998, valuing the company at $1.55 billion.

It was after this sequence of events when Willis Stein stepped in with the hope that it could resuscitate the already ailing flagship publications. Computer Shopper,, and Ziff-Davis’s 11% stake in Red Herring Communications (which owns weren’t part of the Willis Stein deal. Despite this, analysts said at the time that Willis Stein bought the magazines for a bargain, at eight times cash flow, in part because investors were discounting print assets in favor of anything Web related.

Who Wants It?

When Forstmann Little bought out Ziff-Davis for $1.4 billion in 1994, excitement over computer print publications was at its peak. Moreover, despite Forstmann’s track record of buying and selling companies for a handsome profit relatively quickly, at the time it bought out Ziff-Davis, senior partner Theodore Forstmann said his firm was in it for the long haul. The firm nevertheless sold Ziff-Davis after only 10 months, and made a $600 million profit.

Then in 1995, Japanese giant Softbank Holdings bought 70% of Ziff-Davis from Forstmann for $2.1 billion in a highly leveraged deal. By 1997, print publications, even those catering to information technology professionals, began to fall out of favor with advertisers who were choosing instead to focus on – surprise – Internet-related advertising.

Ziff-Davis was snowed under by high debt levels and was performing poorly, and Softbank watched in despair as Ziff-Davis failed to make a profit quarter after quarter. It sold a third of Ziff-Davis on the New York Stock Exchange, and the dismantlement of the Ziff-Davis publishing empire was well underway.

While officials at Softbank and Forstmann Little declined comment, a spokesman for Ziff-Davis would only state: “Since the Ziff-Davis Media Inc. team has been almost completely revamped since the deal with Willis Stein was finalized in 2002, we feel it is inappropriate to comment on past buyouts.”

By the time Willis Stein bought the company in December 1999, it was only the latest in a series of Ziff-Davis sell-offs. In the last six months of that year, the company sold its ZD Market Intelligence unit to marketing firm Harte-Hanks for $101 million in cash; its ZD Education unit, a business-to-business information technology learning organization, to a company formed by a unit of Wasserstein Perella Group for $172 million; and a 64% stake in its ZDTV cable channel to Paul Allen’s Vulcan Ventures.

Willis Stein originally had plans to help the company increase its advertising sales and create ancillary businesses, as it did with Petersen Publishing. “But it has been a tough road and a very steep decline in the market,” Stein says. His firm has certainly been heavy with hands-on operations since the buyout.

Willis Stein sold Ziff-Davis’s Web content business to CNET Networks Inc. for $240 million in October 2000 and fired James Dunning Jr. last August. Dunning had served as chairman and chief executive of the new Ziff-Davis Holdings and chairman of Ziff-Davis but was ousted when Willis Stein hired the former president of ABC Broadcast Group, Robert Callahan. Dunning subsequently sued Willis Stein for breach of contract and libel. He sought more than $200 million in compensatory and punitive damages. Willis Stein countersued, but the situation was resolved in May, and Dunning accepted $2.5 million in a settlement.

In the first quarter of this year, Ziff Davis Publishing Holdings Inc. reported Ebitda of $8.9 million, compared with $32.4 million for the same period in fiscal 2001.

Willis Stein, like other buyout firms since the 1980s, has become increasingly involved when it comes to nurturing portfolio companies. Stein says that the LBO market has changed from one where professionals could “sit back and engineer transactions with very little equity… to a business where you have to be proactive, find things that are growing, be very focused and very strategic.”

Willis Stein has just proposed a makeover for Ziff-Davis Media Inc. to restructure $250 million in debt. It may also need to file a prepackaged bankruptcy reorganization plan. Willis Stein will contribute $80 million to the plan.

Willis Stein and other existing stockholders will get new preferred stock and warrants for their $80 million and will retain majority ownership under the plan.

“In the ’90s, the personality of Ziff-Davis was one with a bit of swagger,” says Stein. “That worked then, but the Ziff-Davis of the future needs to be a lean, mean, better machine. It needs to be an efficient, very well run, very buttoned-down organization that provides unquestionable value to its customers.”

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