Kim Masters: High-Flying Endeavor Brought Down to Earth by Virus and Debt

As layoffs commence and CEO Ari Emanuel forgoes 2020 pay, insiders question how backer Silver Lake Partners will react after a failed IPO and a heavy-borrowing growth strategy put a 7,500-person company in a position "where things had to go great."

Twenty years ago, Ari Emanuel made waves in the media world when he gave a magazine interview in which he described the culture at his then-five-year-old Endeavor talent agency succinctly: “We fight and we fuck.”

Fight they did, at times mocking competitors and dismissing those who thought they were trying to fly too close to the sun. But a decade after Emanuel and his partner, Patrick Whitesell, brashly bought the fading William Morris Agency and then built their company into a diversified, 7,500-person global enterprise, many in Hollywood and the financial community are wondering: Amid a global pandemic, to what degree does that last word in the famous quote describe what's now happening to Endeavor?

Even as the entire entertainment industry suffers greatly amid closed movie theaters and a shutdown of production, Endeavor stands exceptionally exposed. With a debt of $4.6 billion, the key question is what its biggest backer and majority owner, Silver Lake Partners, will do to address the crisis. The private equity firm, which has invested more than $750 million in Endeavor, declined to comment, but a source with knowledge of the investment says, “Silver Lake believes Endeavor is a strong and dynamic company and that its intrinsic value has not been affected by the COVID-19 pandemic.” The source adds that the private equity firm “is as committed as ever to Endeavor and its management team and will stand behind it with capital if and when necessary.”

Some in the Hollywood community believe Silver Lake will indeed stand by Endeavor, but with new strings attached.

“My sense is they’re in so deep they have no choice but to put more money in, but the terms they extract will be tough,” says one veteran studio executive, echoing an opinion articulated by several well-connected industry players. These observers agree Silver Lake is likely to work to restructure Endeavor's debt as they install new managers and reshape the company. How Emanuel and Whitesell will be situated is unclear, but one industry source with ties to Emanuel says he may benefit from a strong relationship with Silver Lake managing partner Egon Durban.

Whether Emanuel, 58, deserves that confidence is a matter of debate; while no one suggests he could have anticipated this disaster, some contend that his company’s aggressive acquisitions left debt-laden Endeavor especially ill-prepared to weather a storm. The company was already under pressure after a planned IPO failed last fall.

Endeavor began layoffs Wednesday while warning ominously in an all-staff memo from Emanuel that there would be more measures “beginning this week and through the month of April” that would affect both jobs and pay. Emanuel said he and Whitesell were working to protect the business while limiting the impact on staff to the degree possible. Their memo lacked details and, grimly, included no words about renewal or underlying strength that would see the company through.

In recent years, Emanuel and Whitesell made a series of audacious acquisitions, diversifying the company well beyond the talent agency business. In 2012, before that expansion got underway, Emanuel posted a list of "Six Lessons I Live By" on his LinkedIn page. “Nobody fucks up like I do,” he wrote, “but you'll never succeed unless you take big risks. Big ones.”

In 2014, Endeavor paid $2.3 billion — far more than the next-highest bidder — for sports, fashion and events powerhouse IMG. In 2016, Emanuel and Whitesell led a group that paid $4 billion for the UFC mixed martial arts league. The deal was widely reported as the single largest transaction in professional sports history.

Certainly there was skepticism. "There's no question that people were saying, `What is your vision here?'" says a former studio chief. And Endeavor also had gone into debt for assets that relied on live events that — again, as no one could have predicted — would become profoundly vulnerable to the economic ravages of the coronavirus pandemic.

Emanuel and Whitesell hoped to pay down some debt (and enrich impatient WME partners) with an IPO. But then the market appetite for public offerings soured, and investors were not ready to buy the story of synergy that the company was trying to sell. At the time, Gene Del Vecchio, an adjunct professor of marketing at the USC Marshall School of Business, said Endeavor had tried to impress Wall Street "with the glitz and glamour of its various entertainment businesses, but financial analysts pierced through the glittery fog."

Now, Del Vecchio says, "The problem with taking on massive debt is that everything needs to go exactly right in order to eventually pay it down. Revenue needs to grow considerably and consistently, and expenses need to stay under control. While Endeavor can weather a small storm, it may prove all but impossible to weather a protracted coronavirus-fueled hurricane."

Asked how he evaluates Emanuel’s position now, one veteran studio executive replies, "That there was a natural disaster — you can’t blame him for that. You can blame him for putting himself in a position where things had to go great."

On Friday, as the crisis unfolded, 180 partners in WME were told that the company was postponing indefinitely the anticipated buyback of their equity shares that had been planned for April 5. The same partners had learned from filings connected with Endeavor’s planned IPO that Emanuel and Whitesell had each sold equity positions worth $165 million in 2017, while asking others to defer a portion of their bonuses or to take stock and await their big payday.

Now, with their troops facing pay reductions and job losses, Emanuel and Whitesell say they will take no salary for the remainder of the year. Whether they can keep key team members in place remains to be seen. Notably, WME did not suffer major agent or client defections in the wake of the shelved IPO, but then again, some may just have been waiting to cash in on the now-postponed buyback of their shares. Now, as rumors circulate of outrage among the partners, one tells The Hollywood Reporter that he’s concerned for those who will lose their jobs but not for well-off upper-level agents.

"Say people make half the money they did last year," he says. "That’s certainly way above the poverty range." As for Emanuel, he says, "Is he not as good a businessman as Jeff Bezos? OK. Is Endeavor/WME still an unbelievable company? I think it is."