Bertelsmann in Joint Venture to Release New Recordings by Established Artists

Bertelsmann, the German media giant, has expanded its recent efforts to return to the music business through a $150 million deal with Primary Wave Music, an American company that handles music publishing rights, artist management and marketing, the companies plan to announce on Tuesday.

In the deal, signed over the weekend, BMG Rights Management, Bertelsmann’s music arm, will buy the bulk of Primary Wave’s publishing assets, including rights to songs by Hall & Oates, Nirvana, Aerosmith and Earth, Wind & Fire. The companies will also form a venture, BMG/Primary Wave Artist Services, to release and market new recordings by established acts.

“This strategic alliance with Primary Wave, one of the most respected independents in the business, gives us control of some of the greatest copyrights in popular music in one stroke, while also strengthening our marketing resources in promoting new recordings,” Hartwig Masuch, BMG’s chief executive, said in a statement.

Founded in 2008, BMG Rights Management was Bertelsmann’s fresh start in the business after the company sold most of its music assets over the previous years to Sony and Universal. The new BMG focused on music publishing rights, which cover songwriting and composition. It built a catalog of more than one million songs, making it one of the largest publishers in the world.

In March, Bertelsmann bought out its partner in BMG, Kohlberg Kravis Roberts, in a deal that valued the music company at $1.4 billion and signaled its eagerness to return to music full throttle.

Primary Wave, which is based in New York, started in 2006 when the company paid $50 million for half the publishing rights of Kurt Cobain, the lead singer of Nirvana. Its publishing catalog has grown since then, but the company has also expanded into artist management, branding and television. Among its most successful acts is the singer CeeLo Green, who is a judge on the NBC talent show “The Voice” and has made product endorsement deals.

As part of the deal with BMG, Primary Wave will be the marketing agent for the songs it is selling, and will retain a small number of publishing assets, including songs by Def Leppard. Primary Wave, which recently raised $125 million in financing from Credit Suisse and SunTrust Bank, will also pay off $90 million in debt in conjunction with the BMG deal.

BMG/Primary Wave Artist Services, the new venture, will release new recordings, with Primary Wave doing marketing and promotion and BMG handling royalty accounting and contracts, Lawrence Mestel, chief executive of Primary Wave, said in an interview on Monday. The label will concentrate on artists who have already built followings, to capitalize on their existing popularity and avoid the risk of trying to break in new acts.

“The signing and marketing of new and developing artists is a very bad business,” Mr. Mestel said. “But the signing and marketing of stars and artists with a track record is a good business.”

DealBook: Verizon Is Expected to Pay $130 Billion for Stake in Vodafone Joint Venture

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Ad Veteran’s New Venture Relies on His Friends

A longtime advertising agency executive, art director and designer is looking to his “friends” for a little help with his new venture.

The executive is Marty Weiss, who is changing his most recent offering, Meter Industries, a brand design and marketing consultancy in New York, into what he is calling Marty Weiss and Friends. The new agency joins a list of Mr. Weiss’s workplaces that also includes Chiat/Day; Weiss, Whitten, Carroll, Stagliano; Weiss Stagliano Partners; and TBWA/Chiat/Day.

The “Friends” in the name is intended to suggest the agency’s model, which is becoming an increasingly familiar one in the advertising business; other examples include Co Collective. Mr. Weiss plans to assemble an appropriate team for each project or assignment from a core group of industry people he knows and firms he has worked with — they will become his case-by-case collaborators.

“I’m not even sure ‘agency’ is the right word,” Mr. Weiss said, “because it’s a bit of an anti-agency.”

Mr. Weiss is promoting his new venture with a campaign in social media, which includes declarations like this one: “We’re not a big holding company. We’re a big hugging company.”

One ad advising that “Meter Industries is now Marty Weiss and Friends” offers a cheeky explanation for the name change: “My therapist suggested I put myself more front and center.”

Among the collaborators on Mr. Weiss’s list are Jon Bond, of agencies like Kirshenbaum Bond & Partners and Big Fuel; Megan Kent, of agencies that include Bouchez, Kent, JWT and Starfish; and Lance Porigow, of agencies like Profero. The roster of “friends” also includes JSC Consumer Insights, Skimatics Web Works and Thinkers and Makers.

“What Marty is doing is not unusual right now,” Ms. Kent said, because many people who used to work for well-known agencies “have developed such a network of associates that it’s easy to reach out to the best in breed” and form what she described as “merry bands of all-stars.”

There are other factors fueling the trend, she said, as some people on Madison Avenue “don’t want to work for The Man anymore” and others consider themselves to be “more interested in the ideas than the office politics.”

Mr. Bond said the formation of Marty Weiss and Friends was another example of how much looser the business is now than it used to be.

In fact, when asked what his appearance on Mr. Weiss’s roster means, Mr. Bond replied, laughing, “I guess it means if something comes up we can both work on, he’ll call me.”

Mr. Bond said he would work with Mr. Weiss on entrepreneurial ventures in the spirit of Mr. Bond’s own company, Tomorrow L.L.C., which takes stakes in agencies, media companies and other firms. “Don’t be telling people I’m going to work on their advertising,” Mr. Bond said.

A longtime client of Mr. Weiss’s said he approved of the new venture.

“The key to the success of our campaign is really Marty,” said Chester Brandes, president and chief executive of Imperial Brands, for whom Mr. Weiss created a campaign for Sobieski vodka that carries the theme “The truth about vodka.”

“Having worked with a number of big agencies, what that proved to me is that you don’t need a big agency and a team of 40 people to get brilliant creative,” Mr. Brandes said.

DealBook: In Venture Capital Deals, Not Every Founder Will Be a Zuckerberg

Harry Campbell

It’s the dream of entrepreneurs to sell their company for millions of dollars. But the dirty secret of venture capital is that the dream can be dashed as the venture capitalists make millions in a sale, leaving the founders with nothing.

A recent Delaware court case arising from the 2011 sale of Bloodhound Technologies illustrates how this happens.

Bloodhound was founded in the mid-1990s by Joseph A. Carsanaro to create fraud-monitoring software for health care claims. After several years of going it alone with a handful of colleagues, Mr. Carsanaro was able to raise Bloodhound’s first venture capital round for $1.9 million in 1999, followed by a second $3.1 million round in 2000.

When the Internet bubble burst, the company underwent rocky times. It was then that the venture capitalists seized control. Mr. Carsanaro was pushed out as chief executive. By 2000, he was gone from the company, as were four other members of his founding team.

For the next decade, Bloodhound recovered and slowly grew, raising seven more rounds of financing. In April 2011, the company was sold for $82.5 million. It was a time for Mr. Carsanaro and his founding team to celebrate their millionaire status.

But venture capital investments are structured to ensure that the venture capitalists are paid before founders and employees. When venture capitalists invest, they typically demand preferred shares that accrue a yearly dividend of about 8 percent. The dividend goes unpaid until the company is sold. In a sale, the original amount and the interest all come due. It must be paid out before the common shares, which are typically held by the founders and other employees.

The requirement that the venture capitalist be paid first, and with interest, can sometimes hit founders and employees in a brutal manner, as Mr. Carsanaro and his colleagues discovered.

The venture capitalists took almost all of the sale price. Bloodhound also paid a $15 million bonus to its current management team. The five founders of Bloodhound were paid in total less than $36,000. One received all of $99.

There is not much information on payouts to founders and employees when a company backed by venture capital is sold. But from the few studies on the subject, it appears that the situation involving Bloodhound is all too common.

The most recent study, by Profs. Brian J. Broughman and Jesse M. Fried, found that among a sample of venture capital deals, the common investors in roughly half the cases were entitled to nothing when the company was sold, even when the sale was for tens of millions. And in all but one instance, the majority of the sale proceeds went to the venture capitalists and other holders of preferred shares.

An unpublished study by Shikhar Ghosh at the Harvard Business School found that three out of four companies backed by venture capital did not return the investment. Again, it is in these cases where the founders and employees typically are entitled to receive no payment.

For those entrepreneurs who think they will be the next Mark Zuckerberg and ride their company to riches, think again. A number of studies have found that most chief executives of companies that take venture capital investments end up being replaced.

These are the successful businesses. The rule of thumb among venture capitalists is that some 20 percent to 30 percent of companies fail, returning nothing to any investor, including the venture capitalists.

The Bloodhound case is a reminder that the founders of start-ups backed by venture capital often end up nothing like Mr. Zuckerberg. Instead, they find themselves thrown out and without significant profits even if their company is sold.

Venture capitalists will argue that this is the price to pay to get their money and services. Cash is king, and in order to survive, venture capitalists will demand a high price and return.

Yet entrepreneurs can protect themselves. Professors Broughman and Fried found in their study that founders who negotiated greater control rights ended up receiving on average $3.7 million more. They did this even when the common shareholders were not entitled to a dime. By negotiating board seats or other representation, the founders were able to ensure that a sale happened only with their approval and a demand for some payment in return.

In other words, the rights negotiated by entrepreneurs when taking venture capital money really matter. Many entrepreneurs are so excited to get money that they don’t push for such rights or just don’t know to ask. Yet those who negotiate to keep a say in their company have a future, while those who don’t are more likely to be tossed aside. And it can be that this happens even in lucrative situations. Remember that Mr. Zuckerberg would have been forced by his venture capital investors to sell Facebook had he not kept control.

In the case of Bloodhound, its founders were pushed out of the company about eight years before the sale. During that time, they lacked control or ability to stop the venture capitalists from financing the company on the venture capitalists’ terms. The only substantial communication the founders had after they left was when they found out that the company had been sold for a huge price and that they would receive almost nothing.

The five founders sued in Delaware court, claiming that Bloodhound’s board and the venture capitalists had structured later rounds to favor themselves and dilute the payout of the founders. In a motion, the defendants countered that they acted fairly and that the plaintiffs’ claims were untimely because they were brought years later.

J. Travis Laster, vice chancellor of the Delaware Chancery Court, found that the claims that the venture capitalist had favored themselves to the detriment of the founders could be a viable claim claim if the facts they stated were true.

If Bloodhound’s founders are successful in their lawsuit, the case could change practices. It might require boards that take venture capital money to consider the founders and their interests before taking the next round. This could force boards to lean against diluting the payout of the founders and employees to avoid litigation.

Yet even if Bloodhound’s founders prevail, other entrepreneurs will sometimes find that their company is sold with nothing going to them. The sad reality is that there are times when the price demanded by the venture capitalists for the company to survive means that the founders will lose. Let’s face it, sometimes the company survives only because of that money and the skill and effort that the venture capitalists put in. This may have been the case in Bloodhound.

But the Bloodhound case publicizes this practice and will perhaps push boards to think harder before the founders are discarded. This may foster caution among venture capitalists, but the only thing that will truly save entrepreneurs is negotiating harder in the beginning. They may otherwise find themselves like the Bloodhound founders, left with nothing.

Joint Venture With China Lifts Pfizer’s Earnings

Pfizer, which is based in New York, reported first-quarter net income of $2.75 billion, or 38 cents a share, up from $1.79 billion, or 28 cents a share, a year earlier. Excluding one-time items, adjusted income was 54 cents a share, a penny less than the forecast of analysts surveyed by FactSet.

Results were helped by a $490 million gain from the transfer of some product rights to its joint venture in China. In the year-ago quarter, Pfizer took charges totaling $1.66 billion for litigation, acquisition and other costs.

Revenue in the latest quarter was $13.5 billion, down 9 percent from $14.89 billion a year earlier and below analysts’ expectations. Sales rose 5 percent to $2.42 billion in emerging markets like China, a crucial growth market for the industry as American and European health programs try to hold down costs.

Pfizer also lowered its earnings forecast by 6 cents to $2.14 to $2.24 a share and its revenue forecast by $900 million to $55.3 billion to $57.3

The current quarter showed the company continued to struggle after losing patent protection in the United States on some of its blockbuster drugs. The biggest hit has come from generic versions of Pfizer’s cholesterol fighter Lipitor, which was the world’s best-selling drug for nearly a decade until it lost exclusivity in 2011 in the United States and in much of Europe last year. Sales of Lipitor, which once brought in about $13 billion a year, dropped 55 percent to $626 million in the first quarter.

The company also has been selling off nonpharmaceutical assets and using the proceeds to repurchase more shares. Indeed, Pfizer noted on Tuesday that it has returned about $8 billion to shareholders so far this year in dividends and share repurchases.

“They’re having trouble hitting their sales goals, so they need to make up for it with financial moves, like buying back shares, that help prop up the stock price,” Erik Gordon, a professor at the Ross School of Business at the University of Michigan, wrote in an e-mail.

Even so, sales also fell for some big sellers still protected by patents, including the erectile-dysfunction drug Viagra, which was down 7 percent at $461 million.

The bright spots during the quarter were Lyrica, for fibromyalgia and other pain, up 12 percent at $1.07 billion, and the anti-inflammatory pain reliever Celebrex, up 3 percent to $653 million.

Fannie-Freddie in Venture to Securitize Home Loans

“The overarching goal is to create something of value that could either be sold or used by policy makers as a foundational element of the mortgage market of the future,” the regulator, Edward DeMarco, who is the acting director of the Federal Housing Finance Agency, said in remarks prepared for a conference.

Fannie Mae and Freddie Mac, which were bailed out by the government in 2008, help finance about two-thirds of new home loans. Mr. DeMarco is seeking to shrink them and reduce risks to the taxpayers who support the mortgage giants.

Since they were seized by the government in the bailout, the companies have drawn nearly $190 billion from the Treasury to stay afloat.

By creating a new securitization company, the Federal Housing Finance Agency intends to pave the way for a single securitization platform, forcing Fannie Mae and Freddie Mac to abandon their current separate systems. Mr. DeMarco said the goal was to build a single infrastructure to support the mortgage credit business.

The new company would be structured as a joint venture owned by Fannie Mae and Freddie Mac, Mr. DeMarco told reporters in a conference call to discuss his agency’s plans.

In the long term, he said, policy makers will most likely decide how the securitization platform is operated, and whether it should be privatized.

“We are on a path to replace the outdated proprietary operational systems of Fannie and Freddie,” Mr. DeMarco told reporters. “It could be turned to some form of a market utility.”

Bits Blog: Bias Plaintiff Says Venture Firm Fired Her

Kleiner Perkins Caufield & Byers Ellen Pao, who filed a sexual discrimination suit against the venture capital firm Kleiner Perkins Caufield & Byers, says she has been fired as a partner.

Ellen Pao, the venture capitalist who sued Kleiner Perkins Caufield & Byers for discrimination and retaliation last May, said late Tuesday that the venture capital firm had fired her.

Ms. Pao wrote on Quora, the question and answer site, that the firm fired her Monday afternoon.

“I have been terminated from my job at KPCB,” Ms. Pao wrote. “On Monday afternoon, senior management told me to clean out my office, leave, and not come back.” Ms. Pao has used Quora before to address the public before. In a post to Quora in June, she said she had no plans to quit working at the venture capital firm.

A Kleiner Perkins spokeswoman could not be reached for comment early Wednesday morning after the Quora post was noticed.

Ms. Pao had continued to work at Kleiner Perkins after she filed her discrimination suit in May.

In her suit, filed May 10 in California Superior Court in San Francisco, Ms. Pao contends that beginning in 2006 she was sexually harassed by another partner at the firm. When she complained to senior partners and others at the firm, her suit claims, they retaliated against her, cutting her out of investment deals and limiting her career advancement. Kleiner Perkins denied all claims.

In July, a San Francisco judge declined Kleiner Perkins’s request asking that the case be sent to arbitration, all but guaranteeing an embarrassing public trial or pricey settlement. Ms. Pao’s lawyer, Alan Exelrod, said at the time that his client planned to pursue litigation.

The case has held Silicon Valley captive particularly because Kleiner Perkins, the venture capital firm that made early investments in technology behemoths like Google and Amazon.com, is one of only a handful of venture capital firms that employs women as full-time investment partners. Compared with Silicon Valley’s other top venture capital firms — Sequoia Capital, Greylock Partners, Andreessen Horowitz, Benchmark and Accel Partners — only Kleiner Perkins and Accel have female investment partners who work full-time.

Kleiner Perkins has been known to highlight the fact that 10 of its 38 investment partners are women. But Ms. Pao’s suit said that in reality, women were passed over for job promotions and given a smaller slice of the firm’s profits.

The Quora post was first noted by the AllThingsD site.