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Best of Liz Benston

Gaming Guru

Liz Benston
 

Harrah's employees ill at ease

15 January 2007

LAS VEGAS, Nevada -- The pending sale of Harrah's Entertainment is fueling great uncertainty among its employees. They are seeking reassurance that their jobs are safe, but as a look inside the company shows, that reassurance is impossible to give.

First, a little history.

A few years ago, Harrah's Entertainment was a mid-level casino company with low-rent casinos and a hit-and-miss track record.

But then the company emphasized a gambler loyalty card, driving repeat business and making newly acquired casinos more profitable. Harrah's boosted quarterly profits to levels that consistently beat Wall Street expectations.

The company's retaillike marketing and its expansion plan - more Starbucks than Wynn Las Vegas - drew notice far beyond the tight circle of the gaming industry.

But despite the outward success, not all was well at the company Bill Harrah started with a small Reno bingo parlor in 1937 and nurtured until it became the first casino company traded on the New York Stock Exchange in 1973.

A victim of its own success, the world's largest gaming company found it more difficult to improve profit and please shareholders. The company fell short of earnings expectations the last two quarters and has missed opportunities to expand in the hot Asian growth market.

While its Las Vegas casinos are more profitable than ever, they face intensifying competition from more luxurious properties opening in coming years.

Then came news of the buyout - $28 billion to take the company private. The offer has been accepted and is awaiting final approvals.

The $90-per-share buyout would net millions for departing executives and other lower-rung employees leaving the company with stock and options now worth two and three times their original price.

Still, the deal leaves many employees who helped the company grow dramatically over the years to wonder whether they will be needed in a slimmed-down operation that focuses more closely on profit. The indicators aren't reassuring.

Last year, Harrah's privately unveiled an efficiency initiative. Chief Executive Gary Loveman said that overhead costs needed trimming. He provided few details, but some experts estimate corporate expenses this year will approach $200 million, up from $98 million in 2005 and $67 million in 2004.

A handful of corporate employees have lost jobs under the initiative. Harrah's spokesman Alberto Lopez says it's not a cost-cutting plan but a "strategic redesign" that also involves reducing spending on certain programs and shifting some corporate employees to other positions.

"This is standard operating procedure for any company," Lopez said. "There are no sweeping changes here."

News of the reorganization, which filtered out to some executives months before word of the buyout offer in October, left employees with questions and dwindling trust in their company.

Trimming overhead is a common strategy for private equity firms. Even if the reorganization and the buyout are unrelated, as the company insists, financial experts say changes are coming.

"Everybody else cuts staff in a buyout. Why should they be any different?" said Keith Schwer, director of UNLV's Center for Business and Economic Research.

"Otherwise these (private equity firms) are not going to buy the company," Schwer said. "They see value by cutting. You're going to get rid of people who were there for the long haul who for the time period they will own the company are not essential."

As a private entity, Harrah's won't need as many administrative employees to prepare accounting documents and communicate financial information to the public.

Experienced top executives - Chief Operating Officer Tim Wilmott, Harrah's Central Division President Anthony Sanfilippo and Senior Vice President of Operations Tony Santo - have recently left the company.

Lopez wouldn't comment on their departures. Whether they were planned as a result of the buyout or not, analysts say the moves will help the company accomplish its stated goal of pursuing growth plans while it attempts to pay down a huge amount of debt after becoming private.

Without commenting directly on Harrah's, Brad Wimmer, a former regulator with the Federal Communications Commission and UNLV economics professor who studies corporate buyouts, says the buyers "see they can increase the profitability of a firm, and part of that profit opportunity has to do with reducing management."

To maximize profit, companies will cut people who contribute least to the company's bottom line, Wimmer said.

"With a leveraged buyout ... there's a closer relationship between who owns the company and who controls the company," he said. Executives take companies private, he said, if they believe that outside influences - such as board members or major shareholders - are working against their goals of maximizing profit.

Wimmer also noted that cost-cutting strategies work. Studies have shown that management-assisted buyouts have boosted productivity and profit, he said.

Harrah's employees ill at ease is republished from Online.CasinoCity.com.