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LACK SEES GROWTH POTENTIAL
IN SBMG

Companies Begin Meetings to Decide Organization, Identify Cost Savings;
Deal Could Close Within Weeks
Sony BMG is picking up the pace. Following early approval by the European Commission, which is still expected to be seconded by the FTC any day now, Sony’s Andrew Lack, who will be the combined company’s CEO says the deal could close within the next few weeks and will provide a new opportunity for growth, according to reports.

Meetings among senior executives to address integration issues are expected to begin this week. Prior to the deal’s approval, Sony and BMG could not negotiate openly about the merger because of regulatory restrictions. Until now, all exchanges of information between the two companies have had to take place in a “clean room” at the New York offices of consulting firm Accenture, which is mediating the deal, the Financial Times reports.

Eyes are now focused on Lack, who has eliminated 1,000 jobs since coming to Sony, and BMG COO Michael Smellie, who will retain his title at SBMG and will be responsible for eliminating over 2,000 more. Lack, reportedly on assurances from Smellie, confirmed Tuesday that SBMG is expecting to achieve $350 million in annual cost savings, according to the Wall Street Journal.

But the final structure of the combined company has not yet been decided. While Lack said combining real estate and back office functions would be two areas of savings, he declined to elaborate on job losses while speaking to reporters Tuesday. The companies have identified some $80 million in savings so far but the bulk of the remainder will come from cuts in marketing, sales and management, the FT says.

However, Lack said he would not prune too heavily on the creative side, according to the Journal: "I am not looking to cut anything out of the strengths Sony and Bertelsmann bring to each other. That's sacrosanct."

Once the cutting is done and the savings achieved, Lack says there will be money available to invest in developing new talent. "We can take that money and redeploy it to grow the business,” he said, while noting that without the merger, he saw growth as unlikely. “We could survive, but I didn't see a growth plan,” he is quoted as saying in the Journal. “We've now got an ability to get our costs in line and then have enough money to put into the resources you need to grow a record company.”

Bertelsmann Chairman Gunter Thielen sounded a note of caution, however, in a letter to employees quoted in the FT. "Even side by side, BMG and Sony Music will continue to face a competitive and hard-fought music market that has by no means recovered from the massive collapses of recent years. Pricing pressure, product forgeries, the growing influence of the major players in music retail and competition from digital media—the problems remain.”

While Lack admitted that completing the integration of the two companies would be “unnerving,” one executive told the FT that 85% of the task could be done within 12 months.
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