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OPEN KIMONO
SAM ZELL IS proud of the fact that his office door has never been closed. “Open kimono!” he shouted, referring to his insistence on clear and visible transparency in business dealings and sharing of information within his own company. Given his disdain for politically correct corporate colloquialisms, it’s perhaps not surprising that he loves to spring that phrase on unsuspecting ears.
While still in the final throes of cashing out on his sale of Equity Office to Blackstone, the rumblings inside the confines of Zell’s office began reverberating through the halls at Equity Group Investments. Zell was simultaneously exploring yet another gargantuan deal, this time in an industry he barely knew, but one with far-reaching influence and even, in his eyes anyway, huge profit potential.
His next and most challenging target was Chicago-based Tribune Company, one of the leading media conglomerates in the world. Tribune is the second-largest newspaper publisher in the world. The company reached more than 80 percent of U.S. households through newspaper publishing, television and radio broadcasting, and the Internet, with operations concentrated in the nation’s three largest markets: New York, Los Angeles, and Chicago. Tribune Company had three main divisions:
Tribune Publishing: Owned the Chicago Tribune, Los Angeles Times, Baltimore Sun, Orlando Sentinel, Hartford Courant.
Tribune Broadcasting: Owned twenty-three major-market television stations, including WGN in Chicago and KXLA in Los Angeles. Its programming division, Tribune Entertainment, produced syndicated staples South Park, Family Feud, Soul Train, and Candid Camera.
Tribune even had a stake in Major League Baseball. Back in 1981, it purchased the often loved yet much maligned Chicago Cubs franchise, along with their stately landmark home, Wrigley Field, for only $20.5 million.
Founded in 1847, Tribune was one of the oldest and most closely watched of American media companies. With the start of the new millennium, however, Tribune’s fortunes went on a roller-coaster ride, marked by ongoing management changes and wild gyrations in its financial performance.
Sitting in his Chicago office, Zell was catching wind of Tribune’s travails, thanks to William Pate, one of his top lieutenants. Pate had an incessant habit of keeping his ear to the ground, searching for the equivalent of corporate roadkill.
A takeover of Tribune would not only be another tall mountain to climb, it would require a mountain of new debt the likes of which even someone as rich as Zell had never financed. It would also put his hands on the true levers of power, the media. Little did he know that Tribune’s travails were about to go on public display.
TUMULTUOUS HISTORY
Tribune’s own storied and tumultuous history speaks volumes about the vagaries of conducting business in the modern-day media world. It is littered with the successes and failures of strong leaders, with family squabbles, with economic challenges, and with corporate gamesmanship. In this sense, Tribune during the upcoming Zell regime mirrored previous decades of upheaval and near-constant change.
Not unlike Zell’s own blockbuster deal for Tribune in 2007, the turn of the new millennium saw Tribune buy out Los Angeles- based rival newspaper publisher Times Mirror. In June 2000, Tribune paid a whopping $8.3 billion in cash and stock, making it the largest publishing deal in history. By most accounts, the price, at $95 a share, was extremely rich. But one group in particular did not mind that one bit.
Throughout its long history, Times Mirror was clearly run as a business first and as a journalistic enterprise second. Like many American publishing businesses, members of the founding family held a major stake in the company and were heavily involved in running its operations. In the case of Times Mirror, a series of trusts named after the founding Chandler family were in place. These trusts would effectively control the company starting in 1938, and ultimately would play a pivotal role in the future direction of Times Mirror.
In 1964, the trusts were enormously enriched when Times Mirror became the first newspaper-based media company to list its stock on the New York Stock Exchange. All was rosy for decades as the Chandlers sat contentedly on their mound of cash. And then Tribune came calling with an offer Times Mirror couldn’t refuse.
At the time of the Tribune takeover, many Los Angeles locals reacted with disdain at the “sellout” to the Chicago interloper. It was much the same way they reacted years later when Zell came to town—with outrage and outbursts of “how dare they sell out,” to the Midwest of all places. Old grudges apparently die hard.
With the purchase, Tribune took over four major newspapers—the Los Angeles Times, Newsday, the Baltimore Sun, and the Hartford Courant, plus three smaller papers in Allentown, Pennsylvania, and Stamford and Greenwich, Connecticut. The deal leapfrogged Tribune into the company of such stellar newspaper publishers as Gannett Co. Inc. and Knight Ridder Inc.
Tribune CEO John Madigan reasoned that “synergies” could be realized between the major-market newspaper, television, and online properties. He envisioned the creation of a national advertising network that could reap significantly higher revenues from selling advertisers the depth and breadth of the country. Thus Tribune Media Net Inc. was born.
But Tribune faced a massive debt load after the acquisition, and divested several properties worth nearly $3 billion in 2000. It also joined with Knight Ridder to form online employment site CareerBuilder Inc.
Still facing $4 billion in debt, Tribune in summer 2001 looked very much like the Tribune of 2008, post-Zell takeover. Tribune Broadcasting head Dennis J. FitzSimons was named president and chief operating officer at the same time the U.S. advertising market began what CEO Madigan called “the worst advertising environment since the Depression.” That year Tribune cut 10 percent of its payroll, or more than two thousand employees.
FitzSimons was elevated to the CEO’s corner office in early 2003 and months later added the chairman’s title to his business card. Tribune continued to experiment with new print vehicles, launching new Chicago and Los Angeles versions of the Spanish-language newspaper Hoy. It also created a free weekly tabloid targeting Chicago’s rail commuters called RedEye.
Advertising growth propelled the company to an astounding operating cash flow of $1.6 billion in 2003, of which $1.3 billion came from the publishing division. But a slumping national economy and rising expenses began taking their toll on Tribune’s bottom line in early 2004, as did charges to eliminate six hundred publishing positions. The stock market, too, had been most unkind, depressing Tribune’s share prices. During the year, the company repurchased 15 million shares of its own stock to prop up shareholder value.
By April 2005, Tribune’s publishing and broadcast revenues had slid to the negative plane of the scale. Even so, only a month later at the company’s annual meeting, FitzSimons boldly declared, “The business of local mass media is healthy and has excellent growth potential. Tribune’s newspapers and television stations are resilient. We have strong franchises in top markets, and they are critically important to advertisers, consumers, and the communities we serve.”
1By early 2006, the news had only worsened. In 2005, the Tribune took nearly $80 million in pretax charges, including shutting down its Los Angeles Times San Fernando Valley printing facility, and millions in severance charges after it cut eight hundred positions. FitzSimons and company were reeling, and in another desperate bid to prop up Tribune’s flagging stock price, FitzSimons announced in late May 2006 that the company would trim $200 million in costs and dig deep into its coffers to buy back up to $2 billion of Tribune stock at $32.50 a share.
THE CHANDLER CHA-CHA
There was just one thing standing in FitzSimons’s way. In a board meeting to approve the measure on June 6, the three members associated with the Chandler family trusts, which controlled 12 percent of the company’s stock, voted against the move. And with that, the war was on.
Zell well understood the subtle—and not so subtle—motivations that were driving the domineering Chandler family two thousand miles away in Los Angeles. The three Chandler board members vehemently opposed Tribune’s proposed stock buyback plan and viewed it as the final straw in their long-running struggle with Tribune management to extract what they viewed as fair value for their ownership stake.
The Chandlers had done well to keep their angst private, but on June 13, 2006, they did the unthinkable. Stealing a page from Zell’s own playbook, they unleashed a salvo across the bow of Tribune’s boardroom. In plain, often terse language, Chandler family attorney William Stinehart laid out the family’s concerns for the first time on public display with an eleven-page invective delivered to Tribune management and unceremoniously filed with the SEC. From the opening paragraphs, the tone was clear:
Dear Directors:
The Chandler Trusts do not intend to tender any shares in response to the tender offer announced by Tribune on May 30, 2006. The Trusts believe that the process by which the offer was presented and considered by the Tribune Board was fundamentally flawed, and that the offer is a purely financial device that fails altogether to address the real business issues facing Tribune. Prompt and meaningful strategic action is required to preserve the premium value of the company’s franchises.
As you know, the basic strategic premise of the Tribune/Times Mirror merger was that the cross-ownership of multiple premium major media properties in the nation’s three largest media outlets would provide a platform to produce above-industry performance for both its newspaper and broadcast assets and for strong growth in interactive and other media opportunities. This strategy has failed and the regulatory change anticipated at the time of the merger to make legal the permanent cross-ownership of certain key assets has not occurred. Over the past two years, Tribune has significantly underperformed industry averages and there is scant evidence to suggest the next two years will be any different. Clearly, it is time for prompt, comprehensive action.
2The Chandlers laid out their opinion, that the company’s publishing and broadcast operations should be split into two units, creating opportunities for a sale to maximize their individual values. Not to mention their stock.
This would be one of the seminal events in the newspaper industry’s illustrious 350-year history, as it starkly revealed the landmines involved in running any modern-day media company. And in a sign of the economic times, it signaled the end of one of the last true newspaper dynasties.
Essentially the Trusts made three propositions to Tribune management—split the newspapers from the broadcasting business in a tax-free spin-off; sell off the newspapers individually or the company as a whole; and appoint a committee of independent directors “to oversee a thorough review and evaluation of the management, business and strategic issues facing Tribune and to promptly execute alternatives to restore and enhance stockholder value.”
And where exactly did the Chandlers place the blame for Tribune’s decline?
The gravity of management’s failure to address fundamental strategic issues is apparent from the precipitous decline in stock value over the past three and a half years. These results have been disastrous to investors. Over the past two years, the value of Tribune’s stock has declined by nearly half. While both the newspaper and broadcasting sectors have been under pressure, Tribune management has had little response.
The Trusts also argued that the breakup value of the company had been largely overlooked or dismissed. Obviously such a breakup would be yet another way for the Trusts to cash out on their long-held Tribune stake. And the Chandlers had obviously done their homework. They surmised that based on several analysts’ opinions the company was worth anywhere from $42 per share to $46 per share, which represented a major premium over FitzSimons’s plan.
Ultimately, the Chandler Trusts made it clear they were the eight-hundred-pound gorilla that would have sway over the future of the company.
OUTRAGED
Once and for all, and for all to see, the Chandler clan wanted out of Tribune. The bloom had decidedly come off their publishing rose, as the present-day family members now viewed their once bountiful object as an albatross with little in the way of a business future. And the shock waves from the SEC filing reverberated across every media outlet in America.
Not surprisingly, FitzSimons was outraged at this public calling on the carpet, as it represented a boldface repudiation of his management of the company. Caught flat-footed by the indignation of the filing, Tribune issued its own formal response via press release on June 14, 2006, in which FitzSimons tried to vindicate himself and Tribune management. “In a changing media environment, our commitment to quality journalism and service to our communities will continue to be a top priority. We believe Tribune Company has a great future and we are focused on creating long-term value for all of our shareholders, many of whom are employees.”
3FitzSimons spent the next two months resisting the Chandlers and pursuing his beloved stock-buyback program, to no avail. By September, the program was over and Tribune formally put itself up for sale. More than a year later, after Tribune was sold, FitzSimons described the Chandlers’ letter as “the most bogus filing of all time.”
4When Tribune’s board met to determine the fate of the company, the options were few—either break it up into pieces or solicit a buyout. During the meeting, the board voted to ease the path to a sale and formed a special committee of independent directors. At the time, Tribune shares were trading around $30. Wall Street and investors demanded action, and the ice was broken with the 2006 sale of Knight Ridder Inc., the nation’s second-largest newspaper chain, to McClatchy Co. for $4.5 billion.
Overseeing the auction was lead independent director William A. Osborn, chairman and a director of Northern Trust Corporation, a $9 billion financial services firm based in Chicago. He would become a pivotal character in the drama that would ensnare Tribune in the long months to come.
The rest of Tribune’s special committee included Enrique Hernandez Jr., chairman, president, CEO, and a director of Inter-Con Security Systems; Betsy D. Holden, a senior advisor to McKinsey & Company; Robert S. Morrison, a former executive of PepsiCo, Quaker Oats Co., and 3M; J. Christopher Reyes, chairman of Reyes Holdings, a food and beverage distributor; Dudley S. Taft, president and CEO of Taft Broadcasting; and Miles D. White, CEO of Abbott Laboratories.
Now they had to focus some serious attention on the task at hand.