Murdoch vs. the Times

by Howell Raines

We had a conversation there that I've been carrying around like a hot rock ever since. As the paper's executive editor at that time, I was eager to hear Murdoch's critique of Escapes, our new lifestyle section. We had rushed Escapes into print to steal thunder from the debut of the Wall Street Journal's ballyhooed Personal Journal section.

Murdoch allowed that Escapes was all right as an attempt to thwart the Journal's targeting of young professional women, a key readership group for the Times. Then he added some advice about how to conduct a newspaper war: "You ought to hit them where they live," he said of the Journal. "Go after hard business news and beat them on their strength."

I can't shake the memory because it seems obvious to me that Murdoch now plans to do to the Times what he was advising me to do to the Journal. He will spend whatever it takes to undermine the Times' standing as America's leading general-interest newspaper. But my real fear is that Murdoch or some other unsuitable purchaser will then buy the Times through a combination of financial and psychological pressures on the strong, but hardly ironclad, Sulzberger family trust that controls the vast majority of the company's voting stock. There is no more important question in American journalism than the future of the Times, and I don't think the newspaper or the journalistic profession is taking Murdoch in particular or the takeover issue in general seriously enough.

It is an article of faith in the Times newsroom that the Sulzberger family trust, updated in 1997 from a previous agreement, is bulletproof. It may be, against the threat it was designed to counter: a renegade cousin or two stampeding the family into selling. But is it built to withstand repeated proxy battles with hedge funds or investment banks attacking the New York Times Co.'s dual-class stock structure? In recent weeks, New York investor Scott Galloway and his Firebrand Partners, along with the hedge fund Harbinger Capital Partners, have bought huge blocks of Times stock. This points to the trust's vulnerability to converging trends unique to this moment—the financial decline of the Times, predatory investors, Wall Street and family anxiety about stock prices, and the emergence of Murdoch as the most powerful individual in mass communications. These factors could bring us to the point where the unthinkable is possible.

When Arthur Sulzberger Jr. fired me in 2003, I took quite a beating from media reporters on journalistic issues. Since then, I've watched Arthur get roughed up by the financial press for his business decisions. Any tendency toward schadenfreude on my part has been offset by two powerful factors. As a Times pensioner, I want the paper to make money under public-spirited owners. As a reader, I believe a Murdoch takeover of our last independent national newspaper would be a disaster for the trustworthy reporting on which our civic life depends. The Sulzbergers are one of the most admired publishing families ever. Throughout his career, Murdoch has used his newspapers and broadcasting properties in a broadly unprofessional way—as political muscle to advance his commercial interests.

Murdoch, jolly pirate that he is, reportedly sent Sulzberger a handwritten note after buying the Journal. "Let the war begin," it said. Since then, Murdoch has targeted three Times strengths—foreign news, the Washington/politics report, and the Sunday magazine—and suggested he'd invest heavily to beat its news sections. You could call it hitting them where they live. I hope the Times has battle plans to which I'm no longer privy, but from the outside, their response to Murdoch's trumpeting seems way too relaxed.

There's no argument that the Times is financially vulnerable, a fact that calls attention to a small but crucial trapdoor in the family trust agreement. In November 2006, the Times saw fit to print the news that by a vote of six to two, the governing board of the family trust could "change the company's corporate structure"—that is, set in motion a sale of the Times to an outside buyer. This came in response to the attempt by Hassan Elmasry of Morgan Stanley to incite a revolt among the owners of class-A stock, who can elect only four of 13 directors. The family owns the great majority of class-B shares through the family trust, electing nine of the 13 and thereby controlling the paper. In my 25 years at the Times, I never heard it suggested that the paper could be sold without unanimous family consent. Now we know that six of eight trustees out of an eventual 50 or more heirs hold this crucial power, a provocative fact in view of stock performance.

Times Co. stock recently slid below $15, approaching the low it hit after Sulzberger replaced his father, Arthur Sulzberger Sr., as publisher in 1992. The stock peaked in 2002 at $53 and has been declining ever since. The trust and the individual trustees collectively hold 9.6 million shares, which have plunged in value from about $509 million to around $184 million. This means that Sulzberger and his relatives have seen the value of their shares fall by more than 60 percent. Their children and grandchildren may be looking at even smaller guarantees. To be sure, there are private trusts for many of these individuals, but most of those are linked to stock price. So an extended family raised to expect that their children would be invulnerably rich across future generations is looking at the prospect of being, by New York standards, sort of rich.

This situation creates a psychological environment that Murdoch can exploit if his plan of pouring money into the Journal has the intended effect of keeping the Times Co.'s stock price down. Forward-thinking cousins are likely to wonder about their share of a cash offer from an outsider with pockets deep enough to pay a premium based on the aura of the brand. For this kind of buyer, $4 billion has been bruited as an attractive price. Higher offers might come from individuals or communications conglomerates looking for a trophy acquisition that could grow in value under new management.

Does the Sulzberger family trust rule out acceptance of such an offer? Not as I read the most recent proxy statement. As the Times has reported, the dual-stock "structure can be overturned" on the vote of six of the eight family trustees. The current trustees are Sulzberger, his sister, and six of their cousins or spouses of cousins. They can take such action tomorrow over the objections of Sulzberger or any future chairman. The issue then hinges on the kind of question that blows dynasties apart. Could dozens of restless heirs—plus the already unhappy owners of class-A stock—exert enough pressure on six Sulzberger relatives to put the company in play?

As far as Wall Street is concerned, it is already in play, according to predictions that represent differing threat levels to the Times' tradition of quality journalism. Here are some:

The Protectorate
I'm impressed by this one, as outlined by a financial blogger named John Ellis, who argues for a friendly sale of the Times Co. to Google. (For Google C.E.O. Eric Schmidt's take on the deal, see "Search Mission.") As I see it, the buyer gets a prestige title and a historical source of quality content. The Times gets a guaranteed revenue stream and a promise of editorial independence. I would go a step further and have Google put the Times into its foundation, meaning that any profits would have to be plowed back into journalism to keep the I.R.S. satisfied. Problem: Google could collapse or be purchased by anyone, including Captain Jack Sparrow.

The Handpicked Buyer
Mike Bloomberg is mentioned most often. He's too rich to milk the company or cheapen the brand, but I don't see him being a nonmeddling owner like Arthur Sulzberger Sr. or Katharine Graham.

Going Local
The underestimated Donald Graham of the Washington Post now looks like the smartest hereditary publisher of his generation because he figured out the wild card you need to play this hand. After limiting the Post's footprint and aspirations to the Beltway, Graham was accused of embracing boutique journalism. But he also made a killer acquisition in the form of Kaplan Inc., an educational-tutoring firm that BusinessWeek called the Post's "financial crown jewel." The Post lives on as a great local newspaper on the strength of non-newspaper revenue. Problem: The Times burned through its killer-acquisition budget over the last 15 years by buying back its own stock and spending $1.3 billion on two dinosaur newspapers in Massachusetts.

Mr. Goodbar
In the past, cruising investors like Saul Steinberg and Morgan Stanley have made passes at the Times, hoping to capture enough noncontrolling stock to break the family lock through legal or fiduciary challenges. Now Galloway and Harbinger, an Alabama hedge fund based on the heavy-construction fortune of the late John Harbert, have bought a 19 percent stake (at press time). The Times rejected Galloway's four candidates for board seats, setting the stage for a contentious April board meeting. Problem: None of these outside aspirants is a sure bet to make money in journalism, much less exercise Sulzberger-style editorial restraint while doing so.

Going Private
Two years ago, I would have bet you that Sulzberger and his closest friend, investment banker Steve Rattner, were quietly scraping up the financing and deep-pocketed partners to help take the Times private. This would soothe the nerves of the newsroom—and your correspondent—more than any other course. Problem: That might require turning a struggling company with manageable debt into a heavily leveraged one.

To me, underlying all these scenarios is the fact that, based on business performance, something's got to give at the Times. That brings me back to my hunch about Murdoch. He portrays himself as ambivalent about the newspaper. One Murdoch associate told me, "He once said to me about the Times, 'I'd love to buy it to close it.' " I believe the first part of that quote is true, the latter part a joke. Recently—and more accurately—Murdoch said in one of his Australian papers that he had considered buying the Times but that Washington regulatory agencies make that impossible.

Ho ho ho. What regulatory agencies? It's unlikely that a McCain White House is going to pump oxygen to the F.C.C., S.E.C., or antitrust division of Justice in time for them to block a media deal of this magnitude. And would any Democratic president choose to start a new term by signing up for the ceaseless pummeling on Fox that would result from thwarting Murdoch? For now, the thing to watch is the newspaper war promised by Murdoch. If his heavy spending on the Journal has the side effect of further depressing Times stock, a lot of cousins could start looking over their shoulders and fingering their calculators.

Times Co. stock recently slid below $15, approaching the low it hit after Sulzberger replaced his father, Arthur Sulzberger Sr., as publisher in 1992. The stock peaked in 2002 at $53 and has been declining ever since. The trust and the individual trustees collectively hold 9.6 million shares, which have plunged in value from about $509 million to around $184 million. This means that Sulzberger and his relatives have seen the value of their shares fall by more than 60 percent. Their children and grandchildren may be looking at even smaller guarantees. To be sure, there are private trusts for many of these individuals, but most of those are linked to stock price. So an extended family raised to expect that their children would be invulnerably rich across future generations is looking at the prospect of being, by New York standards, sort of rich.

This situation creates a psychological environment that Murdoch can exploit if his plan of pouring money into the Journal has the intended effect of keeping the Times Co.'s stock price down. Forward-thinking cousins are likely to wonder about their share of a cash offer from an outsider with pockets deep enough to pay a premium based on the aura of the brand. For this kind of buyer, $4 billion has been bruited as an attractive price. Higher offers might come from individuals or communications conglomerates looking for a trophy acquisition that could grow in value under new management.

Does the Sulzberger family trust rule out acceptance of such an offer? Not as I read the most recent proxy statement. As the Times has reported, the dual-stock "structure can be overturned" on the vote of six of the eight family trustees. The current trustees are Sulzberger, his sister, and six of their cousins or spouses of cousins. They can take such action tomorrow over the objections of Sulzberger or any future chairman. The issue then hinges on the kind of question that blows dynasties apart. Could dozens of restless heirs—plus the already unhappy owners of class-A stock—exert enough pressure on six Sulzberger relatives to put the company in play?

As far as Wall Street is concerned, it is already in play, according to predictions that represent differing threat levels to the Times' tradition of quality journalism. Here are some:

The Protectorate
I'm impressed by this one, as outlined by a financial blogger named John Ellis, who argues for a friendly sale of the Times Co. to Google. (For Google C.E.O. Eric Schmidt's take on the deal, see "Search Mission.") As I see it, the buyer gets a prestige title and a historical source of quality content. The Times gets a guaranteed revenue stream and a promise of editorial independence. I would go a step further and have Google put the Times into its foundation, meaning that any profits would have to be plowed back into journalism to keep the I.R.S. satisfied. Problem: Google could collapse or be purchased by anyone, including Captain Jack Sparrow.

The Handpicked Buyer
Mike Bloomberg is mentioned most often. He's too rich to milk the company or cheapen the brand, but I don't see him being a nonmeddling owner like Arthur Sulzberger Sr. or Katharine Graham.

Going Local
The underestimated Donald Graham of the Washington Post now looks like the smartest hereditary publisher of his generation because he figured out the wild card you need to play this hand. After limiting the Post's footprint and aspirations to the Beltway, Graham was accused of embracing boutique journalism. But he also made a killer acquisition in the form of Kaplan Inc., an educational-tutoring firm that BusinessWeek called the Post's "financial crown jewel." The Post lives on as a great local newspaper on the strength of non-newspaper revenue. Problem: The Times burned through its killer-acquisition budget over the last 15 years by buying back its own stock and spending $1.3 billion on two dinosaur newspapers in Massachusetts.

Mr. Goodbar
In the past, cruising investors like Saul Steinberg and Morgan Stanley have made passes at the Times, hoping to capture enough noncontrolling stock to break the family lock through legal or fiduciary challenges. Now Galloway and Harbinger, an Alabama hedge fund based on the heavy-construction fortune of the late John Harbert, have bought a 19 percent stake (at press time). The Times rejected Galloway's four candidates for board seats, setting the stage for a contentious April board meeting. Problem: None of these outside aspirants is a sure bet to make money in journalism, much less exercise Sulzberger-style editorial restraint while doing so.

Going Private
Two years ago, I would have bet you that Sulzberger and his closest friend, investment banker Steve Rattner, were quietly scraping up the financing and deep-pocketed partners to help take the Times private. This would soothe the nerves of the newsroom—and your correspondent—more than any other course. Problem: That might require turning a struggling company with manageable debt into a heavily leveraged one.

To me, underlying all these scenarios is the fact that, based on business performance, something's got to give at the Times. That brings me back to my hunch about Murdoch. He portrays himself as ambivalent about the newspaper. One Murdoch associate told me, "He once said to me about the Times, 'I'd love to buy it to close it.' " I believe the first part of that quote is true, the latter part a joke. Recently—and more accurately—Murdoch said in one of his Australian papers that he had considered buying the Times but that Washington regulatory agencies make that impossible.

Ho ho ho. What regulatory agencies? It's unlikely that a McCain White House is going to pump oxygen to the F.C.C., S.E.C., or antitrust division of Justice in time for them to block a media deal of this magnitude. And would any Democratic president choose to start a new term by signing up for the ceaseless pummeling on Fox that would result from thwarting Murdoch? For now, the thing to watch is the newspaper war promised by Murdoch. If his heavy spending on the Journal has the side effect of further depressing Times stock, a lot of cousins could start looking over their shoulders and fingering their calculators.