Emak Worldwide Inc. has had something of an identity crisis.
About two years ago, the Los Angeles company changed its name from Equity Marketing Inc. like a teenager taking on a more sophisticated moniker when moving on to college.
The shift documented a break from Emak’s former self: the company had depended largely on Burger King Holdings Inc., its major client, for too long and was announcing its arrival as a multi-faceted marketing services provider with global reach.
The change was more than superficial. Emak’s executives embarked on a diversification course and the company acquired five companies within five years. With its new bundle of holdings, Emak, known for developing Burger King’s promotional toys, gifts and other products, found itself with an expanded presence in Europe, an entr & #233;e
to kids marketing and a broader retail sector role.
What it couldn’t find was a way to communicate the company’s primary goals and a comprehensible corporate structure. It didn’t help that Emak’s focus was diverted to putting out brush fires at its new subsidiaries. One of the flare-ups was at Johnson Grossfield Inc., which lost its business with Doctor’s Associates Inc., parent of the Subway sandwich chain, shortly after Emak purchased it in 2004.
“Typically, when you buy a small company that was pretty entrepreneurial, it is hard to convert it to a corporate entity,” explained Dennis McAlpine, an analyst with McAlpine Associates LLC in Scarsdale, N.Y. Emak, he said, was “going through the transition period. Each one of the acquisitions had some down time and a negative period.”
In other words, Emak’s quest to recast itself made its identity problems worse. The company’s bottom line felt the effects. After net income hit nearly $8 million in 2003, Emak racked up losses of $9.7 million in 2004 and $39.9 million in 2005, the year long-time chief executive Donald Kurz resigned. The company’s stock, which traded in the $7 range early last week, plunged to $5.37 last year after flirting with $16 per share in 2004.
Now, James Holbrook, installed as chief executive in November, is sifting through the amoebic company and trying to give Emak a coherent personality that resonates with clients, shareholders and employees. He has to do so while shoring up the company’s financials to make it attractive to stockholders.
“The strategy of the acquisitions was a good strategy. The execution of integrating the agencies didn’t go as well,” Holbrook said in an interview last week. “So, what we are doing is completing that integration.”
To complicate matters, Holbrook has had to deal with a proxy fight launched by Kurz, who owns about 28 percent of the company’s common stock and wanted to elect a slate of six members to the Emak board. Kurz dropped the fight earlier this month after deciding it wasn’t the appropriate time to distract the management team, but is still pressing for more business development, the consolidation of operations and the revision of a poison pill policy he sees as overly restrictive, among other issues.
“It is an environment in the last eleven months where the stock has taken a precipitous drop, and there is not a lot of encouraging news on the client front,” said Kurz. “As a large holder, I was very concerned.”
Acquisition strategy
Holbrook came to Emak clear that the company wasn’t firing on all cylinders. Kurz left last year under circumstances that he refuses to discuss, citing a confidentiality agreement. Following his departure, Stephen Robeck helmed the firm on an interim basis. Now chairman, Robeck was a founding partner of Emak, which was established as Marketing Equities in 1983. About 15 years ago, Kurz had been recruited by Robeck to help steer the company through a management-led buyout, which was completed in 1991.
The company, traded on the Nasdaq, went public in 1994, the same year it moved its headquarters to Los Angeles from New York. The move was in large part made to capitalize on its entertainment industry ties, which have set it apart from its peers. (Emak has won plaudits for promoting Burger King on the television show “The Apprentice.”)
As early as 1994, the company grew concerned that it was overly dependent on Burger King, which has at times made up as much as 80 percent of Emak’s revenues. To tap other sources of revenues, Emak leaped into the toy business, a logical extension since it was already developing toys for Burger King. Emak started its own toy division designing products for Tyco based on “An American Tail II” and ended up securing a number of entertainment licenses.
Kathleen Joyce, editorial director of the trade publication Promo, said consolidation was occurring throughout the industry. “Emak was part of a general environment of acquisitions,” she said. “A lot of what had been independent shops were made very sweet offers in the 2001-2002 period. The number of independent agencies dwindled as a result.”
Emak’s offers may not have been as sweet as others. Kurz emphasized the acquisition strategy was to buy companies at modest multiples, and Emak even purchased two bankrupt firms. Among the acquisitions were London-based Logistix in 2001. Logistix does marketing promotions for family-friendly brands, including Nestle SA and the Kellogg Co. A year later, Emak added Upshot, which handles promotional marketing for Proctor & Gamble Co. and the Miller Brewing Co. In 2003, Emak acquired SCI Promotion, a provider of gift-with-purchase programs. Two more companies Johnson Grossfield and Megaprint Group were acquired in 2004.
McAlpine suggested that the way in which the acquisitions took place has exacerbated Emak’s problems. He said at least some of the purchases required earnouts, which encouraged managers to stay to recover a portion of future revenues. Emak was left in limbo: it didn’t exert total control over its new parts, but it also couldn’t let them wander aimlessly.
“You don’t want to be too heavy handed or you will lose all your talent,” said Kurz. “As I look back, I think we did some things well, and I believe other things we could have done better. As the leader at that point in time, I certainly take full responsibility.”
But Emak had other issues: the company’s toy division was struggling, and its consumer products’ revenues dipped to around 12 percent of Emak’s total of $237 million in 2005. Consolidation in the retail toy industry hit Emak hard, said Kurz, and he began to extract the company from the toy business. The company’s licenses to produce toys for kids characters Scooby-Doo, Disney’s Kim Possible, Jim Henson’s Bear in the Big Blue House and the Powerpuff Girls expired last year.
Party planning
The acquisition strategy did succeed by one measure: it spread out Emak’s client base. In 2004 and 2005, Burger King accounted for just over 50 percent of the company’s revenues. But it left Emak with higher costs and an array of dispersed components.
Holbrook, who came to Emak after heading St. Louis-based Zipatoni Co., is adamant about putting the company back together again by returning it to its marketing services roots. “We now have a single-minded focus. What we are concentrating on is marketing services for our clients,” he said.
Holbrook has spearheaded an effort to assimilate Emak’s subsections. The company has been arranged into three larger agencies: Logistix Worldwide, a combination of the smaller entities Logistix, Megaprint, Pop Rocket and SCI Promotion; Upshot and Equity Marketing.
Joyce said Holbrook is respected in the promotional marketing field and has the clout to pull off the job of coordinating Emak. “His leadership style is probably a real good fit. He is going to prove to be quite good at bringing together some of the sibling agencies,” she said.
Holbrook has already made substantial personnel moves. He brought in Peter Boutros, formerly chief operating officer of the global marketing and manufacturing company Creata Co., to take over Logistix Worldwide. He also let go of the former chief executive officer, Zohar Ziv, at the end of last year. All in all, Holbrook estimated he has saved $5 million so far from personnel changes and the closing of a warehouse in Ontario.
Holbrook dubs this year a rebuilding year. Next year, he said will be a better year. “Then going forward from 2007, we will be on track,” he declared confidently.
However, McAlpine stressed that combining the company’s disparate elements is a “tough thing to do.” And Kurz is skittish about the results so far, and he’s worried that the company hasn’t taken the right steps for its future. The company’s board adopted the stockholder rights plan or “poison pill” earlier this year that makes it difficult for any hostile purchase to go forward. Kurz wouldn’t comment on whether he might try to buy the company.
Holbrook said he doesn’t foresee a sale any time soon. With companies investigating alternatives to television advertising, he believes Emak is well positioned to take advantage of shifts in the marketing industry.
“Emak is a good public company. Our stock in the past has been well valued,” he said. “If we do the fundamentals well, and execute the strategy we have laid out, we will grow again. After that, we can figure out what kind of party to throw.”
