Lawyers look to EMI after Musicmaker collapse

'Big five' music company EMI has denied allegations that its decision to cash in its 36.5 per cent stake in Musicmaker.com less than a month before the online venture failed may have precipitated that collapse, claiming that the two facts are entirely coincidental.

Musicmaker.com went into liquidation last week. EMI sold its stake on 7 December 2000. The sale was made privately to investment firm BCG Strategic Investors. EMI won't say how much it made on the deal.

Not a lot, we'd imagine. Round about the time of the sale, Musicmaker.com's shares had fallen to around $2, down from a peak of $239 in July 1999, according to UK paper the Mail on Sunday.

EMI took its stake in Musicmaker.com back in June 1999, buying just under half of the company after its initial plan, initiated the previous April, to buy the online operation failed. The EMI talks forced Musicmaker.com to put its IPO on hold for three months or so.

Under the deal, Musicmaker.com paid around $25 million to license the digital rights to EMI's back catalogue, allowing it to offer the label's tracks to its custom-CD customers. Since then, EMI has struck similar deals with a number of other online ventures, licensing digital distribution rights in exchange for undisclosed stakes in each company.

The subsequent collapse in Musicmaker.com's share price prompted a class action against EMI and Musicmaker.com, claiming they had unlawfully talked up the share price.

You can see why the lawyers behind the action are looking very suspiciously at EMI's decision to ditch its stake, particularly given Musicmaker.com's subsequent collapse. For its part, EMI claims the two events are "no more than a coincidence", according to a spokesman cited by the Mail. Does that hide insider trading? It certainly doesn't need to.

Given the already falling share price, EMI probably saw further trouble ahead for Musicmaker.com and decided to cut its losses, just like any investor would. As Ric Dube, an analyst with Net-oriented research company Webnoize, put it at the time: "All anyone has to do is look at the stock price to see that it was a bad investment for EMI."

In October, Musicmaker.com reported Q3 net sales of $845,190, up from $189,091 a year earlier. However, its loss for the three months to 30 September widened to $5.73 a share from the year-ago figure of $2.85 a share. No wonder EMI thought enough was enough.

And presumably so too did Musicmaker.com's bosses, after reviewing the figures for the quarter to 31 December. The decision to liquidate was prompted by the company's inability find a fresh source of finance. Nor could it find a buyer "willing to offer greater value than that expected to be derived from liquidation". ®

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