Ziff Davis coming unzipped

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While the magazine industry was surprised by Ziff Davis Media's sudden ousting of Chairman-CEO Jim Dunning on Aug. 13, no one was more surprised than American Media CEO David Pecker.

Mr. Pecker, whose company is based in Boca Raton, Fla., had flown to Ziff Davis' New York digs that day to meet with Mr. Dunning to discuss a deal to acquire Ziff's consumer titles. Mr. Pecker was waiting outside Mr. Dunning's office at 5:30 p.m. when Avy Stein, a board member and now the company's acting CEO, told him that the titles were not for sale, and that Mr. Dunning no longer worked at Ziff Davis.

Mr. Pecker had been willing to ante up $100 million to $150 million for the two consumer titles-Expedia Travels and Yahoo! Internet Life-and four gaming titles. (Both Mr. Pecker and Ziff Davis declined to comment on this event.)

The business landscape is littered with bloody remains of last year's tech boom. Last week, The Industry Standard suspended publication as it continued to look for a buyer. This year, Lucent Technologies halved its 106,000-strong work force.

Ziff Davis posted a net loss of $49.3 million as revenue fell 32.8% to $85.1 million for the quarter ending June 30 vs. a year ago, according to its Securities and Exchange Commission 10-Q filing.

On Aug. 14, Standard & Poor's downgraded-for the second time in 30 days-Ziff Davis bonds to CCC and below. That level indicates the company's debt-already characterized as "junk bonds"-is vulnerable to nonpayment, and is two levels above the C rating given to companies in Chapter 11. Additionally, S&P placed Ziff Davis on CreditWatch with negative implications, meaning the company's credit is susceptible to more downgrading.

Mr. Stein said the board was looking for a CEO that was "a world-class leader, market- and customer-focused. Someone who is also a very efficient business operator, who can operate well in a down market."

In a conference call with Ziff Davis staffers last week, Mr. Stein said he hoped to find a CEO within 30 to 60 days. Mr. Stein is a founding partner of Willis Stein & Partners, which acquired Ziff Davis in 2000 in a $780 million deal, making it the biggest investment in its portfolio.

"What Ziff Davis needs to do is work as closely as it can with its customers" by offering "great marketing solutions in what is a difficult market for them as well," Mr. Stein said.

Management consultant McKinsey & Co., which has been studying Ziff Davis' operations for some weeks, remains at work within the company, Mr. Stein said.

But there's confusion as to what's next for Ziff Davis. "The only thing that can be done is more dramatic cuts," said one veteran media executive, but Mr. Dunning was well on his way to reducing staff by 23%. Observers speculate Mr. Dunning's plan to expand Ziff Davis' Internet presence will be drastically reduced.

"We are not in any way abandoning the Internet," Mr. Stein said. "We are thinking very hard about exactly what the right strategy is for the Internet as it relates to our publishing business ... and everything else."

The company, Mr. Stein said, would not change Mr. Dunning's Internet plans, but added a decision would be made on Net strategy within a few weeks. Mr. Dunning made much of his getting the online rights to Ziff Davis publication brands back from CNet Networks after it acquired ZDNet.

Reached at his home the day after his ouster and hours before he jetted off to Portugal for vacation, Mr. Dunning declined to comment on all aspects of the situation. A Ziff Davis spokeswoman declined to comment on the status of Mr. Dunning's severance agreement. An insider intimates no severance deal was worked out between the two parties, and that negotiations could turn ugly.

Mr. Dunning's relationship with Mr. Stein dates to 1992, when Mr. Stein backed a lucrative yellow-pages deal of Mr. Dunning. Their most famed deal came when Mr. Dunning bought Petersen Publishing with Willis Stein's backing and flipped it-found "a greater fool," as one deal-side observer put it-two years later to Emap PLC for $1.5 billion in cash and debt. Mr. Dunning remains the third-largest stockholder in Ziff Davis and is involved in other ventures with Willis Stein as well.

A line in Ziff Davis' most recent 10-K SEC filing strongly suggested cash flow was insufficient to cover debt payments. Mr. Stein said, "Ziff Davis has no problems making its interest payments.

"We are in good shape, fine financial shape, and we will support it any way we need to," he said.

Contributing: Tobi Elkin

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