The biggest surprise in the auction of Warner Music Group Corp. was that it happened at all. There were no obvious signals that the time was auspicious for WMG to pursue a sale: not secular trends, not record industry projections and certainly not the precedent of EMI Group Ltd. It didn't even take long memories to recall the disaster of that precedent. The EMI auction ended in May 2007, with Terra Firma Capital Partners Ltd. acquiring the London-based music company for £4 billion ($6.5 billion). But in the fall of 2010, as WMG's directors entertained a similar course of action for all or parts of their New York-based music company, an EMI refresher course was well under way.

It took place in New York federal court, only a few miles from WMG's Rockefeller Plaza headquarters, and featured a case of buyer's remorse the likes of which private equity had never seen. Terra Firma chairman Guy Hands testified during the two-week trial that as the EMI auction galloped to a close he was duped by Citigroup Inc. He claimed, in particular, that a Citi banker misled him into believing the contest's final round had Terra Firma in a dead heat with Cerberus Capital Management LP. History reveals that Terra Firma was the auction's sole final bidder and that the resulting victory, for lack of a better word, would soon force the winning financial sponsor to write off $2 billion of the $2.5 billion of its own capital it sank into EMI. History also shows that Terra Firma not only lost its court case against Citi in late 2010 but, through quirks of British law, lost its EMI asset to Citi in early 2011. The bank, which reclaimed EMI by way of a debt-for-equity swap, is expected to put the asset back on the block in a matter of days.

If ever there were a cautionary tale, if ever red flags were waving investors away from any one industry, they couldn't have been more exhortatory than Terra Firma's courtroom re-enactment of EMI ownership. Yet that didn't keep WMG's directors, led by chairman and CEO Edgar Bronfman Jr. and Thomas H. Lee Partners LP co-president Scott Sperling, from venturing forth with an auction of their own. According to a recent proxy, they voted in November "to commence a strategic transaction process, which would include contacting potential purchasers and preparing a confidential information memorandum describing the company." So began a half-year process in which WMG's counterintuitive decision to explore sales options struck an increasingly resonant chord with a diverse set of contrarians.

By the end of January, WMG had reached out to some 70 suitors and attracted unsolicited indications of interest from nearly 20 others. As this group winnowed through the auction's three rounds, consortia formed and alliances changed. Even Live Nation Entertainment Inc., which never missed a chance to dismiss the music company model as busted, participated. Each participant contributed to WMG's 75% stock price gain: from $4.72 per share on Jan. 20 (the day before the company went public with its retention of financial advisers Goldman Sachs Group Inc. and AGM Partners LLC) to $8.25 per share (the take-out price, for a total of $3.3 billion, announced on May 6).

Suitors who stayed in the game long enough to become finalists also demonstrated an abiding faith in the music business. An auction that could just as easily have been hung, by failing to muster competing bids, turned into a bona fide bidding war. Indeed, after WMG designated Access Industries Holdings LLC the winner, press accounts had two other finalists still wanting to play. "I can't think of another auction where such a colorful cast of characters took such crazy twists and turns," says a source with a bird's-eye view of the remarkably robust process. "And to top it off, almost every bidder had its own angle to play."

That the auction accommodated so many angles is largely a function of the business itself. Music's four major companies -- led by Vivendi SA's Universal Music Group, followed by Sony Corp.'s Sony Music Entertainment, then WMG and, finally, EMI -- each have two divisions: recorded music and music publishing. Recorded music generates revenue from the licensing, marketing and sale of music recorded on physical devices like CDs, DVDs and LPs, as well as from digital distributions like downloads and ringtones. Of the $3 billion in revenue WMG recorded for its most recent fiscal year, $2.5 billion, or 82%, came from recorded music. Music publishing produces revenue by allowing the use of musical compositions under music company ownership or management in exchange for fees and royalties. WMG's most recent fiscal year attributed a little over $500 million, or 18% of total sales, to music publishing.

Although the music majors maintain these two divisions under a single corporate umbrella, the economics of recorded music and music publishing are dissimilar. Only recorded music, for instance, has suffered revenue declines abhorrent by any industry standard. Piracy, digital pricing and bankruptcies among record retailers and wholesalers all played a role in distancing this part of the business from its CD-driven golden era. In fact, since peaking in 1999 with a retail value that the Recording Industry Association of America estimated to be greater than $13 billion, the domestic recorded-music business contracted 48% over the next 11 years to post a retail value for 2010 of $6.9 billion.

Music publishing, by comparison, has been a paragon of resiliency. That is, with diverse revenue streams from radio, television, advertising and other sources, music publishing not only protects the majors from the vicissitudes of the economy but insulates them from the vagaries of consumer taste. In addition, thanks to the digital exploitation of music in downloads and ringtones, music publishing is benefiting from new sources of sales. Witness eMarketer Inc.'s $3.8 billion projection for North American music-publishing revenue in 2011, up from $3.2 billion in 2006.

That its directors were open to selling WMG in total or in pieces made the auction's early stages palatable to a diverse group of suitors. Risk-embracing bottom feeders who believed recorded music had nowhere to go but up could bet on just that proposition, whereas risk-averse investment seekers disposed toward glamorous assets could focus exclusively on WMG's music-publishing division, Warner/Chappell Music Inc. Meanwhile, for synergy-seeking insiders or big-money outsiders with a view toward combining WMG with EMI to create a market leader in an alien industry, only the entire company would suffice. Then, should regulators some day decree, those parts keeping a WMG-EMI combo from being in statutory compliance could themselves be sold.

Such was the landscape when WMG auction managers Goldman and AGM distributed confidentiality agreements to the 37 suitors that, to quote the proxy, "expressed potential interest in a strategic transaction with the company." Access Industries, an industrial group built and owned by Len Blavatnik, was not among the 27 parties initially executing such an agreement. (It would wait until March 22 to do so.) But Access Industries was among the 10 suitors submitting a preliminary bid between Feb. 22 and Feb. 27, having based its nonbinding offer solely on public information about WMG and its industry.

Of those 10 preliminary bids, four were for the entire company, three for recorded music and three for music publishing. And, as befits an auction in its first round, the prices were all over the map. For the entire company, the proxy reports a low-bid range between $6 and $6.50 per share and a high-bid range between $7.25 and $8.25 per share. For recorded music, the low-bid range came in between $700 million and $900 million, and the high-bid range wavered between $900 million and $1.1 billion. Music publishing, with only a fifth of the revenue of WMG's recorded-music division, attracted offers about twice as high: a low-bid range between $1.45 billion and $1.5 billion and a high bid of $2 billion.

"This strikes me as pretty much true to form," an auction veteran says after being briefed on WMG's proxy about the sale. "As a buyer, the whole idea is to make it into the next round. As a seller, the objective at this stage isn't price so much as it is identifying who's committed to the process, who's willing and able to do the really hard work."

For WMG, the quantity and quality of responses meant the game was on. The music company, which went public in 2005, knew at the outset that it didn't have to sell. But it also knew that if it were going to sell, it had better do so before EMI. After all, WMG was still predominantly backed by private equity, with THL, Bain Capital LLC and Providence Equity Partners Inc. owning more than 60% of the stock. These same three financial sponsors, moreover, had been WMG's primary investors since buying what was then the music division of Time Warner Inc. in 2004.

Seven years is a long time for private equity -- even for sponsors that, in the case of WMG, had already taken out $1.40 for every dollar they invested. What's more, were EMI to beat WMG to market, any exit strategy those sponsors might then entertain could be compromised. That's because many perceive WMG to be EMI's only logical buyer. Yet the fulfillment of this perception would likely require that WMG's sponsors stay the course another three to five years. They'd almost have to, a veteran dealmaker says, not only to close on EMI but to reap the rewards of combining it with WMG. Pursuit of this scenario could, however, backfire. "Say WMG bids aggressively for EMI but for some reason loses," the dealmaker continues. "Its sponsors would definitely want to sell at that point. Only they'd have to sell into a market that, because of the EMI sale, no longer has a full set of bidders." Hence WMG's counterintuitive but correct decision, at least according to the veteran dealmaker, to front-run the EMI process.

On May 20, with the release of a proxy about its sales agreement, WMG gave the M&A crowd a new parlor game. It did so by having the regulatory filing identify auction participants as "Bidder A" through "Bidder N." (Only Access Industries, the winner, is consistently identified by its real name.) The 204-page proxy then disperses enough information to allow close followers to discern, in almost every case central to the auction, the entity behind the pseudonym. Bidders A and B, for example, are credited with instigating the process by approaching WMG last fall about its music-publishing business. They're further identified as "industry participants," which already narrows the field to a precious few, as opposed to "non-strategic bidders."

Although WMG declines to comment on Bidders A through N, it doesn't have to. The former gives itself away when the proxy reports that an unsatisfactory first-round bid was followed by a revised proposal "regarding a potential acquisition of the company's music publishing business and selected recorded music assets, an acquisition of select European music publishing assets, as well as an alternative bid for the entire company." Those very actions were associated in the press with BMG Rights Management GmbH, a joint venture between German media giant Bertelsmann AG and New York-based private equity firm Kohlberg Kravis Roberts & Co. LP. In little more than a year, before setting its sights on Warner/Chappell, this JV had already scooped up five independent music publishers.

Bidder B, which like BMG Rights as Bidder A originally targeted music publishing, loses its anonymity after forming a "Bidder B Consortium," consisting of Bidder B, Bidder J and Bidder L. Their coming together was in response to a determination by WMG's board that "a sale of the entire company to a single bidder was likely the best way to maximize value." The board adopted this view during its April 12 review of eight second-round bids: three for the entire company, two for music publishing, one for recorded music, another for recorded music or the entire company, and an outlier offer to cherry-pick assets from both recorded music and music publishing.

"While separate bids for the music publishing business and recorded music business could yield a combined bid at an attractive valuation," the proxy explains, "this alternative had significant downsides, including among others, significant restructuring and tax costs and complexity associated with the separation of the two businesses and other execution uncertainties (including significant antitrust risks and the complexity and uncertainty arising from negotiations among multiple independent parties acquiring different assets of the company)."

On May 5, three days after the third-round deadline and one day before the auction's conclusion, the Bidder B Consortium pulled together to submit a revised final offer for all of WMG of "up to $8.50 per share." Although this offer potentially topped the $8.25 per share that Access Industries already had on the table, the Bidder B Consortium conditioned its club bid on, among other things, "approvals of its senior management, Bidder B's board and a third party." News accounts at the time recognized just such a bid as coming from Sony, Ron Perelman's MacAndrews & Forbes Holdings Inc. and Guggenheim Partners LLC -- aka Bidders B, J and L. As for the third party from which Bidder B would need approval, that's the estate of Michael Jackson, who in 1995 entered into a JV with Sony to form Sony/ATV Music Publishing.

Replacing pseudonyms with their proper nouns adds to the drama of other auction participants as well. Take Bidder H or, in reality, Vivendi's UMG. The proxy reports the music industry leader didn't even enter the fray until late March, and only then at the behest of BMG Rights so that the latter could improve its bid. By early April, though, UMG had already "requested, and was granted, permission to explore potential collaborations" with Sony and Live Nation (or, in proxy-speak, Bidders B and I). Notwithstanding its speed dating with potential partners, UMG tendered a final-round conditional bid that was entirely its own. And, just like the Bidder B Consortium's vague but final submission, the operative word here really is conditional. UMG's eleventh-hour offer did not include "a definitive price," the proxy elaborates, but stated the ultimate price "would be based on a valuation for the entire recorded music business of $1.45 billion" -- provided, of course, that such a bid could also survive "due diligence, preparation of carve-out financial statements (which would take at least several weeks) and Bidder H board approvals."

The ever-changing affiliations and never-ending conditions brought to the auction by the likes of BMG Rights, Live Nation, Sony and UMG were characteristic only of its strategic participants. Nonstrategics, in contrast, tended to be resolute in purpose yet flexible when necessary. This was true of Access Industries, the auction's winner, almost by definition. But even Bidder F -- the pseudonym for the combined effort of Los Angeles private equity firms Platinum Equity LLC and Gores Group LLC, which were founded, respectively, by brothers Tom and Alec Gores -- displayed an eagerness that strategics seemed to lack. At the very outset, before WMG demanded bids for the entire company, the Platinum-Gores team offered up a choice: Acquire the entire company for $7.25 to $7.75 per share or recorded music for a price between $1.05 billion and $1.1 billion. It also provided clarification, as did Access Industries, on key issues going into the auction's final round, whereas, the proxy notes, "The Bidder B Consortium never responded to such request." Then, on submitting a final bid, Platinum-Gores' only condition was a 72-hour period of exclusivity.

"They fielded a very strong A team," says a person familiar with the brothers' participation throughout the auction. "They really dug in to understand the business, which isn't easy when you're simultaneously being sold on it." This music company inexperience may very well explain the Platinum-Gores team's end-of-auction status as runner-up. Granted, a third Gores brother founded and runs Los Angeles-based Paradigm Talent Agency, whose music division roster boasts nearly 500 acts. But it's unlikely this association provided anything near the knowledge that Access Industries' Blavatnik obtained during his four years as a WMG director. And though he stepped down from that board in 2008, in deference to the demands of his own business, Blavatnik's most recent Form 4 still has him owning 2.3% of WMG's outstanding shares.

Two attributes that Blavatnik and the Gores brothers do share, however, is birth outside of the United States and inclusion on the Forbes 400 list of America's richest: Blavatnik most recently ranks No. 31, Tom Gores No. 153 and Alec Gores No. 238. Those detached from the auction might dismiss these shared traits as a coincidence. But some close to it, or even a part of it, see them as a testament to entrepreneurship. "They all use small teams that work well together and bring a formality to the process," one such observer volunteers. "They all use their advisers rather than rely on them. Yet they all know, at the end of the day, they don't need permission from anyone and that the final decision is theirs to make."

To be fair, unlike their strategic counterparts, the auction's financial sponsors and wealthy individuals had no regulatory risk to contemplate. And to call such risk worrisome for strategics borders on understatement. As one such participant puts it: "You sit there in meetings with your lawyers, trying to sort out the regulatory issues, and they say: 'If you do this, there's a 60% chance this will happen. But if you do that, there's an 80% chance it won't.'?" Still, considering the hundreds of millions in synergies a combination with WMG would bring, the undeniable fact is that the auction was for strategics to lose. Also undeniable is that not a single one of them stepped up and boldly declared it would take on the entire company -- whatever the regulatory risk -- then worry about satisfying the relevant government bodies only after those hundreds of millions in synergies had been irreversibly secured.

One source blames this lack of boldness on the difficulty strategics have in believing that somebody outside of their industry might actually want in it. Insiders have lost sight that they're still in a great cash flow business, he says, and that technological advancement may allay piracy while some of music's other pressures may simply abate. With this in mind, Access Industries' Blavatnik may have had just enough distance to see the business not only for what it is but for what it can be. Equally important is the dealmaking moxie he brings to his vision: Had his final all-cash offer failed to produce a definitive merger agreement within 24 hours, the proxy states, Access Industries "would no longer be willing to continue its participation in the process." It's a call to action strategics may wish to consider should they marshal the courage to buy EMI.