The post mortem on Imagine Films Entertainment has begun, with Wall Street exex and entertainment toppers left wondering if a small entertainment firm can, in fact, successfully function as a publicly held company.

Imagine founders Brian Grazer and Ron Howard have proposed to buy out their public shareholders at $ 9 a share, after initially offering the stock at approximately $ 8 a share in 1986. The stock price went up as high as $ 16 in the company’s six-year run, but, for a variety of reasons, its founders were unable to significantly increase the value of those shares for their investors by either diversifying into new businesses or creating enough hit films or TV shows.

“Imagine’s investors took out basically the money they put in. It was positioned as a high-risk, high-reward situation and investors didn’t make anything for taking that risk,” said Ivan Luftig, an investment banker with Wertheim Schroeder in New York.

The company’s public shareholders are more than disappointed. Four shareholders’ lawsuits have been filed in Delaware accusing the company’s founders of trying to buy it for less than its worth, which some contend is as high as $ 12 a share.

Even the professional investment community is disillusioned by Imagine.

One investment banker, citing the earlier failures of the Cannon Group, Carolco, DeLaurentiis Entertainment, and Weintraub Entertainment, said that among his colleagues, “The feeling is entertainment companies are simply too costly and too risky.”

Like its peers, Imagine ran into a host of problems that limited its ability to expand. Some of those problems grew purely out of market conditions and others, insiders say, sprang from bad management as a result of creative executives running their own company, instead of a “pure business” chief executive at the helm.

Imagine tapped an array of executives to supplement the talents of its two creative founders, but the position turned into a revolving door. Neil Braun, now a topper at Viacom, Tony Ludwig, of CAA, and Robert Harris, a former prez of MCA Television, all were on the Imagine team within the first few years of its existence.

No one at wheel

But, say insiders, no one really took command of steering the company’s business future, focusing on filmmaking instead.

“The real difficulty here is that creative people were running the company, and even when they had partners who work for them, the creative person has the say,” said one insider. “Creative people can’t make the same evaluations a businessman can. Imagine is a lesson that can help investors learn. Creatives shouldn’t run companies.”

But others blame the board. “The board was at fault for not forcing them to hire a chief executive,” said an insider.

Money was second among the factors that drove Imagine into the ground. “Imagine was an incorrectly structured company from the start and undercapitalized,” says Wertheim’s Luftig. “It was never able to capture cash flow from ancillary media and the market misperceived their profit potential.”

Imagine started out raising $ 40 million to position itself simply as a development company that would finance its film projects through third parties and make its profits from producers fees as well as a percentage ownership on its projects. The second stage of its initial business plan then was to use its stock as a way to finance acquisitions, to grow and diversify so that it could create different sources of cash flow.

“The problem is Imagine never reached stage two,” said a former exex with the company.

After it went public, Imagine signed a five-year 30-picture deal with Showtime as an initial step towards financing its projects. However, it was when the company sought a studio partner that insiders say it stumbled.

U backing

Imagine had initially planned to sign up for film financing with TriStar, whose deal-oriented head Victor Kaufman, insiders say, talked of putting Imagine on a diversification track. However, Imagine ended up getting backing instead with Universal, which had different priorities. “Tom Pollock was more focused on making Imagine as a film company work because he needed films,” said a former Imagine exex.

And it seems as if Imagine never regained its focus on diversifying through business lines, rather than creative product. Its top exex looked at buying into other businesses, such as a distribution company or a video production company, but no decisions were ever made.

As a result, Imagine was even more dependent on its producers fees and the income flow from its film and TV projects. And it failed with its TV projects, including “Parenthood,” and “My Talk Show,” taking what one insider estimated was a $ 10 million hit to its bottom line, with MCA the bigger loser.

In short, the company was left in just one business–films–and it had to share its net profits on those films with Universal.

No go with the flow

And despite a slate that drew successful box office including “Kindergarten Cop” and “Parenthood,” Imagine faced “a rollercoaster of cash requirements,” explains Wertheim’s Luftig. “No one can consistently produce hits and you have to get a flow of cash coming back to you.”

“Brian and Ron’s fees were going to cover overhead, like salaries and the costs of renting an office, but no real value was being created with the stock,” said another exec. “The stock would only run up on anticipation of a release, and run back down afterwards.”

Moreover, another former top exec explained, the company was “locked into a 1986 formula when $ 15 million was fine for a film’s negative cost. In a few years, that had doubled as well as P&A and the outside fees Brian and Ron could command for their services, compared to the salaries they were being paid.”

Diversification may not have been Imagine’s winning strategy, since it failed for many other independents. However, says one Hollywood dealmaker, “We’re all smarter now about running indies than we were when Imagine went public.”

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