Going Ape for Entertainment

By MICHAEL QUINN

Imagine if two battling behemoths like King Kong and Godzilla decided to join forces. Talk about a knockout combination. That's how the entertainment industry reacted last week to the disclosure that Japan's Matsushita Electric Industrial, the world's largest maker of consumer electronics, is negotiating to buy MCA, the American show-business giant, in a deal that could be worth more than $7 billion. The acquisition would represent an even more titanic version of the hardware-meets-software combination pioneered by Matsushita's rival Sony, which bought CBS Records for $2 billion in 1988 and Columbia Pictures for $3.4 billion in 1989.

MCA (1989 revenues: $3.4 billion), based in 420-acre Universal City, Calif., is like a department store of American amusement. MCA's Universal divisions have produced such blockbuster films as The Sting, Jaws, E.T. and Back to the Future, as well as such TV programs as Major Dad and Murder, She Wrote. Universal Studios Tour in California is the third most popular amusement park in the world, after Disney's two U.S. attractions. MCA Records is a hit factory with platinum stars that include Tom Petty, Bobby Brown and Fine Young Cannibals. In book publishing, the company owns G.P. Putnam's Sons, which has had best sellers with Tom Clancy's The Cardinal of the Kremlin and Amy Tan's The Joy Luck Club.

Yet not everything has gone smoothly for MCA lately. Cineplex Odeon theaters, an upscale venture that charges as much as $7.50 for a ticket, lost $12 million in the first quarter of this year after expanding rapidly. And the $640 million Universal Studios amusement park in Florida, which opened in June, has been plagued by technical failures. But MCA chairman and patriarch Lew Wasserman, 77, apparently believes MCA's biggest strategic shortcoming is its failure to find a merger partner that would enable it to compete with such giants as Fox Inc. and Time Warner.

Matsushita (1989 revenues: $44 billion) commands an array of brands, like Panasonic, Pioneer, Technics, Quasar and JVC. The company makes products ranging from stereos to refrigerators to bicycles to semiconductors. It is twice Sony's size, and developed the VHS videocassette format, which prevailed over Sony's Beta in a bloody competitive battle.

Yet Matsushita is going through a mid-life crisis of its own. Growth in the electronics market has slowed from 20% in the 1970s to about 10% in the past decade. Sony's move into the more profitable entertainment industry thus presented a challenge to Matsushita. By acquiring music and movie companies, Sony gained control of the software that helps stimulate the market for electronic products. Matsushita had little choice but to do likewise. The merger faces one bothersome hurdle: while Matsushita has a cash hoard of almost $10 billion and no long-term debt, rising interest rates and a sagging Tokyo stock market may make financing the acquisition difficult. In Tokyo financial experts give the deal no more than a fifty-fifty chance of success.

Matsushita faces another challenge, which is the difficulty of blending its conservative corporate culture with MCA's Hollywood approach. The clash was less pronounced for Sony, which is considered more worldly and innovative. As did Sony, Matsushita is paying for the services of a Hollywood matchmaker, superagent Michael Ovitz of Creative Artists Agency, who is acting as middleman.

Sensitive to the brewing backlash against Japanese investors, Matsushita officers are taking pains to characterize the MCA bid as a proposed "merger," a word with less aggressive overtones than "takeover." While many Japanese bureaucrats are uncomfortable about Matsushita's high-profile shopping trip, the government would not interfere with the acquisition of MCA. The Japanese know that in the 1990s hardware and software will go together like song and dance.

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CAPTION: MATSUSHITA ELECTRIC

MCA

With reporting by Pat Cole/Los Angeles and Barry Hillenbrand/Tokyo