Essence of a break up. (Business News).

WHEN ED LEWIS AND CLARENCE SMITH CUT A DEAL WITH AOL TIME WARNER TWO YEARS AGO, THEY WERE OFFERED THE PROMISE OF FRESH CAPITAL AND NEW MARKETS FOR THE LEADING BLACK WOMEN'S MAGAZINE. LITTLE DID THEY KNOW IT WOULD MEAN THE SPLIT OF A 32-YEAR-OLD BUSINESS PARTNERSHIP AND A FIGHT FOR THE SOUL OF AN INSTITUTION.

SCORCHED BY THE SUMMER HEAT, HUNDREDS OF THOUSANDS OF AFRICAN AMERICANS POUR into New Orleans. For them, it is part of an annual Independence Day ritual in which they, engage in three days of music, culture, and camaraderie. The event: the Essence Music Festival.

This year was different though. The participants of the mammoth event may have been oblivious to it, but a major behind-the-scenes player was missing. Absent was Clarence O. Smith, the visionary who gave birth to the festival eight years ago. He was the smooth-talking rainmaker who held myriad meetings with the top city officials and assembled a relentless sales force to snare millions in sponsorship dollars. And although the entrepreneur was key in organizing this years extravaganza--the most successful ever with an attendance of 223,000--he was nowhere in sight.

Several days before the event, Smith, the man who helped build Essence into one of black America's most recognized brands, became a man without a company. At the New York City headquarters of Essence Communications Partners (No. 25 on the BE INDUSTRIAL/SERVICE 100 list with gross sales of $144 million), Smith signed documents severing ties with a company he spent half his lifetime building. In effect, he was granting a divorce to Chairman and CEO Edward T. Lewis, his partner of 33 years, in what was considered one of the longest-running marriages in black business.

The press release issued by the company on June 28 stated that the 67-year-old "had been planning his resignation for some time and is currently making arrangements to pursue existing and new media projects outside of Essence." But BE learned that Smith did not leave; willingly, nor was his split with the company amicable. Inside sources say Smith was forced out of the company following a board vote. In an interview with BE, Lewis says: "We wanted him to retire, but he decided to resign. That's all I can say on the matter."

The move represents the latest jolt to the leading media entity targeted to black women since it entered into a historic partnership with Time Inc., the publishing arm of AOL Time Warner. When Smith and Lewis closed the deal in 2000, Time Inc. walked away with a 49% ownership stake, while Essence gained the opportunity to align itself with a multimedia octopus that has tentacles in publishing, cable, and interactive media. With the capital and resources to expand the brand, the two partners asserted at the time that Essence could be a mainstream media powerhouse.

But the deal is proving to exemplify the challenges inherent in a strategic alliance between a revered African American institution and a sprawling corporate leviathan. Over the past two years, Essence has benefited from the partnership through a reduction in production costs, increased exposure, and counsel from the editorial and business staffs of Fortune, Money, America Online, and other entities trader the AOL Time Warner umbrella. But the joint venture has also fueled management turmoil, cultural conflicts, and, as evidenced by Smith's exit, boardroom intrigue.

Moreover, inside sources say Smith's removal is part of "the slow takeover of Essence" by AOL Time Warner, an action that will be complete within three years when Lewis turns 65--an age when many CEOs check out. The recent action further compounds the sentiment of a skeptical and protective segment of the black community that believes it will lose yet another institution. There was a similar outcry when Berry Gordy's Motown was acquired in 1988 by a white investment firm, and when Johnson Products, the legendary Chicago-based haircare products company known for its Afro Sheen and Ultra Sheen brands, was sold to the majority-owned cosmetics and pharmaceuticals conglomerate Ivax Corp. in 1993. After all, it took a decade of mergers and acquisitions for African Americans to cede their dominance of the black haircare market. (See "Bad Hair Days," November 2000.)

As a media property, Essence, many believe, holds a public trust--one that is responsible for preserving the image and voice of black women. "When these large companies `buy' us, there's money on the table and perhaps an expansion on the business side, but the community factor is lost," says Hermene Hartman, publisher of N'Digo, a black lifestyle magazine in Chicago. "That's just part of the hazard when these large companies buy our companies--they change them. And I'm sure that's a factor at work here."

Lewis calls such allegations "poppycock." Says the soft-spoken chief executive: "Ever since we did the deal, people have been saying that we've been acquired and I sold out. Time Inc. made an investment that will help us expand in our space."

BE interviewed members of Essence's current management as well as corporate insiders, former employees, and industry observers--some who requested anonymity--to find out the impact the AOL Time Warner-Essence joint venture may have on the management, marketing, and mission of an African American business icon. Smith. however, declined to comment for this article.

THE END OF AN ERA

Smith's departure--which the company admits has been in the works "for some time"--ends what was once considered the most successful partnership in black business. Lewis and Smith were recently hailed in BE's June 2002 issue as "Marathon Men," chief executives who have run the five companies that have been listed on the BE 100s since its inception 30 years ago.

But sources say the merger further exacerbated conflicts between the two partners on strategic and management issues. For instance, Smith became increasingly resistant to AOL Time Warner's influence on the organization. The Lewis-Smith split became so nasty it was prominently featured in an item written by popular New York Post gossip columnist Cindy Adams--a rare and inauspicious occasion for black business. She wrote that "bad blood is coagulating at Essence" and that Smith had been "beheaded." She further alleged that the joint venture "may have been the spark but the triggerman was Lewis."

Despite the turbulence, Essence Communications Partners remains a BE 100s company. It has retained its 51% black ownership status through Essence Communications Holdings (ECH). African American shareholders include top executives Lewis and Editorial Director Susan Taylor; board members Camille Cosby, wife of famed entertainer Bill Cosby; financier J. Bruce Llewellyn, CEO of Philadelphia Coca-Cola Bottling Co. (No. 3 on the 2002 BE INDUSTRIAL/SERVICE 100 list with $419 million in gross sales); and venture capitalist Frank Savage, former chairman of Alliance Capital Management International. Another major shareholder is John H. Johnson, chairman of Johnson Publishing Co. Inc., publisher of Ebony and Jet magazines (No. 4 on the BE INDUSTRIAL/SERVICE 100 list with gross sales of $412 million). Smith's shares have been acquired by ECH and redistributed among its shareholders.

Smith, who Lewis and others have credited as being integral in generating millions of dollars in revenue through ad sales, developing the entertainment division, and building the Essence brand, will now be recognized as president emeritus and co-founder. Smith's former partner will assume his duties--he was CEO of Essence Entertainment at the time of his resignation--and will also now oversee the Essence Music Festival, the Essence Awards television program, and the essence.com Website.

CHANGES IN MANAGEMENT

Smith's exit is the latest development in a series of recent changes. Last July, Target Market News, a Chicago-based newsletter that covers African American media and marketing, reported that bed-and-breakfast and restaurant owner Monique Greenwood was replaced by Diane Weathers, a 30-year magazine publishing veteran, amid rumors of "friction" between Greenwood and Taylor. As editorial director, Taylor, one of the company's strongest brands, controls the overall vision and direction of the publication. Since the management change, "In The Spirit," Taylor's monthly column of inspiration, has been moved from the middle of the magazine to a page before the table of contents, signifying her long association with the magazine and her connection with its readers.

Although the revamped editorial management team was not associated with the joint venture, sources say AOL Time Warner did have an influence on business personnel adjustments. Over the past year, a number of Essence employees in sales, marketing, and research have been laid off--a sort of housecleaning after last year's festival--and most of them were replaced with Time Inc-ers. The most prominent appointment was the instituting of Michelle Ebanks as group publisher in April 2001. She comes to the position with general-market experience and impressive credentials over her six-year tenure with Time Inc. Ebanks served as a vice president for AOL Time Warner's publishing division, working closely with then-CEO Don Logan, the chief negotiator on the partnership on business and strategic initiatives. She also served as CEO and president of Mutual Funds magazine and as general manager of Money magazine. Reporting to Lewis, Ebanks maintains "a strategic leadership role overseeing and expanding the publishing franchise."

Lewis says, "Time Warner is not involved in day-to-day management decisions, just long-term strategic issues as investors and board members." The identification of such new hires, he says, is simply a function of "getting the most talented executives."

Keith Clinkscales, CEO of Vanguarde Media, the fledgling publisher of Heart & Soul and Honey magazines, two titles that compete with Essence, says that such criticisms leveled at the partnership and the subsequent management changes are without merit. "If you say only black people should run black magazines then you have to say the contrary--only white people can run white publications. There are more mainstream magazines than there will ever be black magazines so that thinking would be detrimental in the long run," he says. "Owner[ship] and editorial [leadership are] separate. Editorial [leadership] should be done by people who have an affinity and passion for the audience they are dealing with. Now the owners don't have to do that. In an ideal world, [it would be great] to have a black-owned and black-edited magazine speaking to a black audience. But that model is tough to follow in today's environment."

One ex-employee of Essence holds a more practical view of the round of dismissals. "They're basically doing what any other corporation does when new management comes into place," says LaJeanna McKnight, who worked as merchandising manager for Essence until last December, "They want to bring in people they have relationships with." McKnight was identified as one of Ad Age's Women To Watch in 2000.

But some believe new management will translate into a watered-down editorial focus. In Columbia University's New York Review of Magazines, Newsday Assistant Managing Editor and columnist Les Payne said: "You cannot go to bed with an 800-pound gorilla and not expect things to change. At the very least the bed will tilt."

Others share that view. "I've seen editorial changes in Essence; there's more fashion in it, less human interest, and fewer compelling stories on black women's issues," says N'Digo's Hartman, who has always been a fan of the positive images reflected in Essence's editorial and advertising. Ebanks says Essence will continue to "do what we have been doing, which is speaking directly to black women."

Operating in one of the toughest environments for magazines, Essence is more than holding its own. It faces competition from such publications as Heart & Soul, Honey, and O, the ultra-successful joint venture between the Hearst Magazine Group and Oprah Winfrey's Harpo Inc. (No. 9 on the BE INDUSTRIAL/SERVICE 100 list with gross sales of $285 million). Asserts Ebanks: "Nearly 15% of all black women subscribe to Essence [and] one in three African American women read [it]. It is unheard of to have the level of penetration Essence has."

WILL ESSENCE STAY BLACK-OWNED?

Lewis, Taylor, and Ebanks are focusing on how to further leverage the relationship with AOL Time Warner, which just a couple of months ago was dealing with its own management turmoil as well as a flagging stock price. In fact, Lewis says the company will continue to benefit from its relationship with AOL Time Warner's Richard D. Parsons, the first African American CEO of the media monolith, and Logan, who recently became chairman of the newly created Media and Communications Group when COO Robert Pittman was ousted. Besides achieving critical cost savings in such areas as printing and production, Lewis seeks to expand the franchise through the acquisition of new publications or related businesses. "We're in a virtual candy store," he quips. "We haven't taken full advantage of it yet."

Will Essence follow the path of BET Holdings, which became a unit of Viacom when it was acquired for $3 billion two years ago? "I don't know what's going to happen in the future," asserts Lewis. "Right now, I'm focusing on how we can expand this company."

In the end, it comes down to one question: Can a black company coexist with its corporate partner and stay true to its mission? In the coming years, Essence's continuing drama may provide the answer.

The Time for Essence

1969: Edward Lewis, Clarence Smith, Cecil Hollingsworth, and Jonathan Blount form the Hollingsworth Group, the parent company of Essence magazine.

1970: The first issue hits newsstands in May. The press run was for 250,000 copies.

1971: Blount and Hollingsworth leave Essence after a dispute.

1973: Essence Communications appears on the first BE 100s list at No. 63 with gross sales of $2 million.

1976: Blount and Hollingsworth sue to regain control of the company.

1978: Blount and Hollingsworth's case is thrown out of court.

1981: Susan Taylor, the magazine's fashion editor, is named editor-in-chief. She becomes the face and voice of the magazine for the next 20 years.

1984: Smith and Lewis start Essence By Mail, which puts the company into the mail-order retail business. Essence launches a nationally syndicated TV show.

1987: The company holds the first Essence Achievement Awards, an annual televised salute to the subjects who have appeared in the magazine.

1995: Essence launches the highly successful music festival, a three-day event that this year drew more than 200,000 attendees.

1996: Smith and Lewis develop Essence Entertainment, the division that houses the company's music festival, awards show, and music label. Essence also teams with Latin publisher Christy Haubegger to launch Latina, a bilingual, women's lifestyle publication.

AOL Time Warner

2000: Smith and Lewis enter into a deal with AOL. Time Warner, giving it 49% ownership of Essence Communications.

2001: Michelle Ebanks, a former lime Inc. vice president, becomes group publisher of Essence magazine. Smith assumes the role of CEO of Essence Entertainment.

2002: Smith resigns from Essence, ending one of the longest marriages in black business.

--Additional reporting by Sonia Alleyne, Alan Hughes, Matthew S. Scott & Sakina P. Spruell