“We were all getting along, but it wasn’t the happiest of moments for anybody. Jerry felt a need to consolidate what he was doing; he was concerned about the future and about getting enough money so that he didn’t have to worry. Nesuhi, I think, just wanted to get out and do something else. I didn’t want to sell the company—the company was my idea, it was my brainchild, and we were doing well. I saw no reason to think that disaster was imminent. However, they were so insistent on selling. I really didn’t have an option.”
—Ahmet Ertegun
The overwhelming sense of regret Ahmet had experienced after losing Ray Charles paled in comparison to how he felt about letting his older brother and Jerry Wexler persuade him to sell Atlantic Records in October 1967 for a sum Wexler would later accurately describe as “something of a joke.” In truth, Ahmet never really opposed the deal, a position that then made eminent sense.
Although Atlantic placed an unheard-of eighteen records in the Billboard Hot 100 in June 1967, with Jerry Wexler’s landmark production of Aretha Franklin’s “Respect” at number one and “Groovin’ ” by the Young Rascals in the second slot, the writing was clearly on the wall for independent record labels. In Chicago, Vee-Jay had gone bankrupt and would soon be forced to auction off five thousand priceless masters. In a steep decline as the market for the blues disappeared, Chess Records would in a year’s time be sold for roughly a third of Atlantic’s purchase price to a California conglomerate that eventually destroyed the label.
Throughout the record business, there was also a good deal of fear that the FCC intended to reopen the secret payola hearings it had held in Los Angeles in June 1966. Despite the great run of success Atlantic had enjoyed by distributing hits by Stax-Volt artists like Otis Redding, Sam and Dave, Rufus and Carla Thomas, and Booker T. and the MG’s, a new label had begun giving Ahmet fits in the market that his company had dominated for the past two decades.
As Ahmet would later say, “What the industry generally called ‘The Atlantic Sound’ was eventually superseded by the Motown Sound, which was fabulous. It got me right away and I didn’t know how to reproduce it and it scared the shit out of me. We didn’t understand how to write it, we didn’t understand how to play it, we didn’t understand how to sing it. It was newer and hipper than what we were doing and it got to the public in a very heavy way and became pop music.”
Atlantic’s predicament was further complicated by the fact that most of the black artists who were selling big on the label had been signed by Stax-Volt. Originally formed as Satellite Records by Jim Stewart, who was then joined by his sister Estelle Axton, the label had made a distribution deal with Atlantic in 1965. After Ahmet and Wexler signed Sam and Dave, they put them on Stax and allowed Stewart to record them in Memphis. Wexler and Stewart soon became so close that whenever Stewart came to New York, he would stay in Wexler’s house on Long Island.
Having never read the contract they had both signed, what neither man knew was that attorney Paul Marshall had specified that Atlantic would own all of the Stax masters. As guitarist Steve Cropper would later say, “It was a terrible deal—Atlantic really used us. But we needed them badly, so we used them as well. We needed them because it’s very hard for an independent to be heard anywhere outside of its own territory.” While the deal proved incredibly favorable for Atlantic, yet another clause in the contract allowed Stax to end the agreement if Atlantic was ever sold, thereby diminishing Atlantic’s potential value if it ever changed hands.
Along with Wexler and Nesuhi, Ahmet had already cleared the decks for a possible sale by buying out the company’s other two stockholders. At Wexler’s urging, Miriam Bienstock had been paid $600,000 for her 13 percent share of the label. As she would later say, “I didn’t want them to sell the company but that was why I had to go. There was no great regret on my part when I left and I think Jerry was happy because now there was no obstacle in his path.”
Between what he had been paid over the past twenty years and the buyout for his 50 percent share of the label, Dr. Vahdi Sabit received “between two or three million dollars from the company” for his initial $10,000 investment. Giving up his dentistry practice, Sabit, in Ahmet’s words, “then moved to the south of France and gambled. He went to the casino every night and after about fifteen years, he lost it all and went back to Turkey. I didn’t want Atlantic partners who were destitute so I put him and his wife on salary and for the rest of their lives they got $24,000 a year.”
Now the majority partner at Atlantic, Ahmet had blocked the sale of the label to ABC Records for $4 million because of the company’s demand that the partners indemnify it against potential lawsuits. In Paul Marshall’s words, “I represented Atlantic when ABC was trying to buy them and Jerry was very upset with me because after having negotiated for three months and finding out that ABC was asking for things I would never advise my client to do, I really fought it. Jerry was furious with me because he really wanted that. He wanted the security.”
In Wexler’s words, “I had this feeling that a puff of wind could come along and blow us all away, instantly. All you had to do was make a succession of flop records, and you get blown away. The rewards were enormous—but so were the risks. [Atlantic was] like a little family corner store that used to be just plugging along with everybody very happy—it couldn’t stay that way. It was either grow or disappear. And who’s to predict? Everybody else disappeared.”
Hitting his full stride as a producer, Wexler had decamped to Memphis and then Muscle Shoals, Alabama, where he began generating big hits with Wilson Pickett and Aretha Franklin that earned him the Record Executive of the Year award in 1968. Doing the brunt of the in-house studio work at Atlantic as Ahmet spent more time in Los Angeles pursuing white acts like Buffalo Springfield, Wexler had become so vital to the label’s success that Ahmet could no longer withstand his partner’s desire to cash out by selling the company to the highest bidder.
In Ahmet’s words, “Wexler was sure that eventually our luck would run out. As he put it, if our luck ran out, we’d be back in the tenements somewhere so he figured, ‘Let’s get something so we know we’re safe for the rest of our lives, right? Who cares, right? We had a good time. Made some terrific records, right? This company wants to buy it? That’s it.’ ”
For far more personal reasons, Nesuhi was also willing to go along with the plan. As Mica would later say, “In the Eastern hierarchy, the elder son is the leader. For Nesuhi, it was very hard to accept that Ahmet was that person at Atlantic. He always tried to be on an equal basis with him but it didn’t work. I think partly because of the complex of being with Ahmet, Nesuhi wanted to sell.”
Although Ahmet, in his words, “could have put up the money to buy them out and I thought about that, I would then have had to run the company by myself and I wasn’t ready to do all the work they were doing. It was like buying out the people who were responsible for a lot of the good things that were happening. If I had bought them out, then I would have had to say, ‘Okay, you have to work for me for another two years.’ They would show up and not do anything. So that was why I agreed to sell. I wanted to stay with them and for them to stay with me. They were so insistent that I gave in.”
At Atlantic, the groundwork was now in place for a deal that would come to be regarded as one of the worst financial decisions in the history of the record business. A company that would eventually be valued at between $2 to $4 billion was about to be purchased for about as much money as it had in the bank.
About six months after Alan J. Hirschfield had left his position as an investment banker at Allen & Company to put together the acquisition of Warner Brothers by Seven Arts Productions for $32 million, he was contacted by his friend Tommy Kempner, a partner at Loeb, Rhoades “whose wife was Nan Kempner, a very prominent socialite, who was a good friend of Mica Ertegun.” Having become the chief financial officer of the newly merged company, Hirschfield was also overseeing music operations at Warner Bros. and Reprise Records on the corporate level and so Kempner arranged for him “to meet Ahmet Ertegun and Jerry Wexler and that was how it all started.”
Right from the start, the partners at Atlantic made it plain to Hirschfield they were “very anxious to sell” the label for a variety of reasons that included the looming payola scandal “mainly regarding the black acts,” the future profitability of performers like Aretha Franklin, Otis Redding, Wilson Pickett, Sam and Dave, and Booker T. and the MG’s, and their concern “the white acts they had that were then bubbling under would never replace those revenues.”
Unlike Ahmet, Clive Davis, the president of Columbia Records, had attended the Monterey Pop Festival in May 1967. Having already outbid Ahmet for the seminal San Francisco band Moby Grape, who never hit it big, Davis had also signed Blood, Sweat & Tears, the Electric Flag, and Big Brother and the Holding Company, featuring Janis Joplin, to his label. For its share of the burgeoning white psychedelic rock market, Atlantic had to rely on Buffalo Springfield, Iron Butterfly, the Vanilla Fudge, and an English blues trio called Cream, who had yet to make it in America.
Because Ahmet and Wexler seemed eager to do a deal, in Hirschfield’s words, “It was not a long negotiation. One of their problems was that they had about $6 million in cash in a lot of places that was company money. Some of it was in banks. Some of it was in cash in various and sundry places. It was all on the books but the problem was justifying where it had come from as well as how they were using it which would have been even more difficult because of what was in their files.” The Atlantic files, which Hirschfield saw, “had every disc jockey in the United States’ shoe size, hat size, preference in women, and drugs of choice. It was a very dirty business and the black side was particularly dirty and I think it is accurate to say that a lot of the cash was being used to pay disc jockeys.”
Precisely where all the money had come from was another matter. As Hirschfield would later say, “Some of it could have come from cutouts [records sold at discount], or returns. Some could have come from record stores in direct payments that they turned to cash and didn’t report to the artists or the government. Those would have been the most likely sources.”
Because Atlantic was a private company, the partners had for years also “been paying themselves big salaries and charging everything they could to the business. Ahmet always lived off the business. So what happened was, we gave them twelve million up front, six of which was their own cash. We kind of laundered the money for them, which was a big inducement because now it was clean. So if they hadn’t accounted for it to the IRS or the artists, it now got paid to them as a capital gain on which the tax rate was then around 25 percent rather than 60 percent on personal income. Which was perfectly legitimate but a great way to wash it.” Hirschfield also offered the partners 66,000 shares of Warner-Seven Arts stock worth $3.5 million, a $2.5 million note, and a share of the profits in the merged venture that could amount to as much as another $4 million over the next three years.
To bring about the merger between Seven Arts and Warner Bros., Hirschfield had made a deal with Frank Sinatra, who owned one third of Reprise Records, and his lawyer Mickey Rudin. Sinatra had reduced his interest to 20 percent of the label in return for $3.2 million in cash and the guarantee that if Hirschfield acquired other music companies, the singer would receive one fifth of the purchase price as well. While Hirschfield kept his associates at Warner-Seven Arts apprised of his negotiations with the partners at Atlantic, Sinatra’s lawyer Mickey Rudin was the one “who loved the deal. Frank didn’t particularly understand it because he hadn’t heard of anybody on the label. His world was Dean Martin and Sammy Davis and Petula Clark and Trini Lopez.”
When Hirschfield finally reached “the point of deal or no deal, when even Jerry was nervous,” he reached out to Sinatra for help. “I said, ‘Francis, listen, we’re on the verge of closing this deal but I’ve got some nervous sellers. One of them, Ahmet, is skeptical.’ Ahmet could have cared less who Frank was. But Wexler would get tears in his eyes when he talked about Frank. He was his idol.”
Hirschfield then asked Sinatra if he would host a cocktail party for the principals as well as their attorneys and accountants at the singer’s apartment. “I explained to him who their acts were and who Aretha was and I said, ‘There’s this guy, Jerry Wexler,’ who Frank had heard of as a great producer. I said, ‘He’s going to pee in his pants if you just give him a hug. Trust me. This is going to make you very rich.’ ”
After everyone had assembled in Sinatra’s apartment, where “there was a great spread and Frank couldn’t have been more gracious and welcoming,” Sinatra went over to Wexler “and literally put his arm around him and said, ‘Jerry, I hear you got this great kid, Aretha Franklin. I think she’s great. Can I ask you a question?’ Jerry could barely talk by that point. ‘Anything, Frank. Anything.’ He said, ‘Do you think she’d do a duet with me?’ At that point, I thought we were going to have to change Jerry’s underwear. I looked at Frank and I couldn’t believe what was coming out of his mouth and at that point I knew we were going to sign a deal within days.”
Sinatra also charmed Ahmet and Nesuhi, with whom he talked about jazz and, as Hirschfield recalled, “That was how it happened. I remember it like yesterday. I got a hold of Frank and said, ‘I knew you were good but I didn’t know you were that good.’ I gave him a big hug and the rest was history.” Less than two years later when Warner-Seven Arts was acquired by Steve Ross and Kinney National, Sinatra was paid $25 million for his 20 percent share of the company.
The year after Warner-Seven Arts acquired Atlantic Records for about $17.5 million (the modern-day equivalent of around $115 million), “the earnings doubled and the year after that, the earnings doubled again.” While, in Hirschfield’s words, “Jerry and Nesuhi were pretty happy” about the deal, “Ahmet never got over that he had sold the company too soon and I think he blamed me for it for years. Quite frankly, I think they didn’t see what was happening as well as people like Clive Davis and Joe Smith and Mo Ostin and they sold themselves short. I think it was the confluence of the scandals and the problems they were having with the black acts but they sold for about as much money as they had. In net-out, it basically cost us nothing.”
Telling a completely different version of his meeting with Sinatra in his autobiography, Wexler admitted that his never-ending anxiety about money was a major factor in bringing about the sale of Atlantic. After receiving his share of the purchase price, Wexler happily phoned an old friend from Washington Heights to inform him that Bennett Avenue “has its first millionaire.” Conceding the label had been sold for far less than it was worth and that if the partners had waited a year, they could have asked for twice as much, Wexler added, “I have no regrets. The sale meant comfort and security for the rest of my life.”
Sadly for Wexler, this did not turn out to be true. As he would say forty years later, “My end of the buyout was $4 million. A million of that went to taxes. So I had $3 million. I divorced my first wife. Half of it went to her plus a couple of houses. How the hell did I exist thereafter? Ahmet stayed the course and was probably worth more than a hundred million by being there when all the good stuff came down. The dollar options. The Time Warner deal and AOL and this and that. Just by staying there.”
The year after the partners sold to Warner-Seven Arts, Atlantic grossed $45 million. Ahmet and Wexler offered the new owners $40 million to buy their label back only to be turned down. Although Ahmet and Jerry Wexler were still running the store at Atlantic, they no longer owned it. And while Ahmet would thrive in the corporate world that was now the order of the day in the record business, the same could not be said for the man who had pushed hardest for the sale of Atlantic in the first place.