Sparks Fly at Management Powerhouse SFX

Can the company created almost overnight hang together? Superagent David Falk's curious decision

David Falk may be the most powerful sports agent ever. With his shaved head and ready-for-combat countenance, he is certainly the most fearsome. For two decades, Falk and his haughty negotiating style have been complicating the lives of the teams he bargains with--and showing the money to a list of star clients that includes the best basketball player ever (Michael Jordan) and a string of others.

So it was more than a bit curious when Falk, 50, announced in April that he is throttling back his hard-driving career. According to execs at SFX Sports Group, the sports-management powerhouse he helped to create, Falk has voluntarily given up his title as chairman to leave him more time to spend with his family.

Falk's competitors in the sports-agent biz still haven't stopped tittering. In fact, it's hard to find one who accepts the story at face value.

Few doubt that Falk will be a major force in their industry for years to come. But many agents question the future of SFX Sports, whose list of clients brims with World Series heroes, basketball MVPs, and a tennis champ, Andre Agassi. And Falk's stormy tenure isn't the only reason.

Since entertainment-and-sports conglomerate SFX was sold to Clear Channel Communications Inc. (CCU ) last August for $4.4 billion, SFX Sports has been buffeted by controversies. They include a conflict-of-interest brouhaha involving principals of Clear Channel, the San Antonio-based media giant that controls 1,170 domestic radio stations and owns some 700,000 outdoor-advertising displays. Although Arn Tellem, the superagent who represents Kobe Bryant and is assuming some of Falk's duties, suggested that the famously loquacious Falk would be available for this article, Falk declined to comment. But L. Lowry Mays, chairman and CEO of Clear Channel, told BusinessWeek: "We like the business, and I don't see any reason to exit the business." And he adds: "Last time I talked to David Falk, he was very happy. He expected to be with the company for some time."

The conflict-of-interest flap arose because two pro-sports franchises (the Texas Rangers and Dallas Stars) are owned by the vice-chairman of Clear Channel, Thomas O. Hicks, and one (the Minnesota Vikings) is controlled by a major shareholder, Red McCombs. The appearance that agents report to team moguls has called into question the independence of SFX Sports.

SFX officials say they have tried to fix the conflict problem with a restructuring plan that gives agents greater autonomy. Separate baseball and basketball groups now operate with less oversight from Clear Channel, they say.

"We have total freedom to run our businesses--hire, fire, and do whatever we think is necessary," says Tellem. Players' unions for the four major sports have yet to signal their approval, but Tellem adds: "My understanding is we're very close to having this all resolved." And concerns about conflicts didn't stop SFX from signing nine first-round picks in last year's NBA draft.

Still, the turmoil at SFX runs deep. Agents Jim Bronner and Bob Gilhooley, who sold their Speakers of Sport (SOS) firm to SFX in February, 2000, only to be fired later, are suing SFX Sports Group Inc. and SFX Entertainment Inc. (SFXE ) in federal court for $60 million. They allege that SFX fraudulently withheld information about the coming takeover by Clear Channel.

Both sides have agreed to arbitration, but the suit casts a harsh light on the machinations inside a sports empire built at lightning speed. In a 20-month spending binge, Robert F.X. Sillerman, SFX's former executive chairman, engineered the buyout of four elite sports- agent firms for cash and stock totaling about $200 million. Sillerman's most expensive and high-profile purchase was Falk's agency, F.A.M.E., which cost $120 million, including $82.9 million in cash. The acquisition spree, which ended six months before the Clear Channel takeover, brought under one roof agents for about 16% of Major League Baseball players and 18% of NBA players.

EGO CLASH? Not all of the soloists thrown together by this breakneck expansion have adapted well to the go-along-to-get-along demands of corporate life. "These are people who are successful and often ego-driven," says Craig Fenech, a veteran agent with friends at SFX. "At this stage of their lives, they're not going to take well to getting approvals from someone who knows less about how to operate a sports-agent business than they do."

From the start, critics have questioned whether SFX Sports was built to last. Its roots go back to SFX Broadcasting, sold to the predecessor of Clear Channel in 1997, and the company it spun off, SFX Entertainment. With Sillerman and Michael Ferrel, president and CEO, at the helm, SFX Entertainment began rolling up promoters of live performances and venue operators. Then it turned to sports representation.

Sports celebs, say industry observers, were a boost to Sillerman's ultimate goal: selling the company at a heady profit. "He's an acquirer of companies, not a builder. His interest is in the endgame," says Bob Gutkowski, a former SFX exec who was forced out in a bitter dispute with Sillerman after Falk was chosen to run the sports group. Gutkowski is now president of Magnum Sports & Entertainment Inc.

Mark McCormack, head of International Management Group (IMG), the sports-marketing and management behemoth whose closest rival is now SFX Sports, predicted weeks before the deal with Clear Channel was announced that Sillerman would sell out. "That's the only thing he could have been [rolling up sports agencies] for," says McCormack, author of What They Don't Teach You at Harvard Business School. "He got out of it with billions. But that doesn't mean the business model works."

Sillerman, who left SFX after it was sold, rejects such talk. He says flatly: "I've never in my life been involved with a company built to be sold."

Creating an SFX sports division turned out to be none too difficult. Top agents who had spent their careers cobbling together lists of star clients were happy to cash out their businesses, especially at the prices being offered by SFX. Says McCormack: "I don't know anything about what SFX did in the entertainment business. But everything they did in sports, they vastly overpaid for." Veteran baseball agents Alan and Randy Hendricks took in a cool $15.7 million for their company, which represents future Hall of Fame pitcher Roger Clemens. Gilhooley, Bronner, and their partners at SOS, whose clients included Red Sox pitcher Pedro Martinez, picked up about $30 million. For his $120 million payday, Falk agreed to go to work for SFX for five years and, if he left before the deal expired, not to compete in the sports-agency biz for one year.

FREE AGENTS. Not always clear, though, was what SFX's millions were buying. Agents joining SFX agreed to sign over revenues due them from player contracts and endorsement deals already negotiated, sometimes with payments going four or five years into the future. But the players weren't part of any deal. Jordan, for example, is free to take a walk on Falk--and SFX. Sillerman, who met with Jordan before finalizing the deal with Falk, says such scenarios were carefully considered before offers were made.

Still, experienced agents say it's risky to bank on the loyalty of mercurial stars. "In our business, we have a theory: Every hour of every day, directly or indirectly, someone is trying to steal your client," says Steve Kauffman, a veteran agent for NBA players.

For now, Clear Channel seems committed to holding on to its star-crossed sports group even though it's a minuscule part of the $8 billion company. "If Roger Clemens got hit by a bus, as a Yankee fan, I'd be upset. But it would be a nonevent for Clear Channel," notes William M. Meyers, an analyst at Lehman Brothers.

Meanwhile, the continuing buzz among sports agents is that Falk would like to reclaim F.A.M.E. from the clutches of Clear Channel. One potential sticking point: how much of that 120 million bucks he'd have to give back.

Corrections and Clarifications This story on SFX and superagent David Falk ("Sparks fly at SFX," Sports Business, June 18) erroneously said that Falk represents NBA star Allen Iverson. Falk is no longer Iverson's agent.

By Mark Hyman, with Skip Rozin

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