The Deal from Hell

In March 2000, Leo Wolinsky walked into the Los Angeles Times editorial recognition awards dinner filled with promise. Once a year, the paper’s editors nominated and selected the paper’s best work over the past twelve months. Over a lavish dinner, winning reporters and editors were rewarded with as much as $5,000. The Times paid its staff better than most American newspapers, but not many journalists ever got rich toiling in the trenches. The awards event was a good way to recognize a job well done with an offering of cash or stock to employees who weren’t eligible for bonuses. (In Chicago, the Tribune carried out its own iteration at the Beck Awards, named after longtime managing editor Edward Scott Beck, who was managing editor from 1910 to 1937.)

Having left his Porsche with the valet at the Beverly Wilshire Hotel, Wolinsky entered the ballroom. Around nine hundred staff members and guests were expected. Well-dressed reporters, editors, and their guests mingled over cocktails, gossiping about newsroom politics and speculating on who would win the twenty-two awards that would be passed out that evening. Shortly before the program was to start, the Los Angeles Times’ editor, Michael Parks, tapped Wolinsky on the shoulder and suggested they go for a short walk.

The day before the awards event, Wolinsky had sniffed around the business offices at the Times to investigate rumors buzzing in the newsroom of the company’s sale to Tribune Company. “Everybody in financial said,‘No way it could happen.’” Wolinsky later recalled. “Everyone still thought the Chandler trusts wouldn’t allow a sale of the Los Angeles Times. There were all kinds of investment bankers upstairs, and we started thinking maybe we, Times Mirror, were going to buy something.” When Parks asked Wolinsky if he’d heard the rumors, as they strolled the grounds around the Beverly Wilshire, Wolinsky told him that he’d investigated them and they were patently untrue. Parks stopped in his tracks, looked Wolinsky in the eye, and said simply that he couldn’t comment. “And that was it. The first thing I did was call David Shaw [the Times media writer] and told him he’d better start making some calls,” Wolinsky later recalled.

Times Mirror insiders and outsiders bought the line that Wolinsky got from his friends in financial. Even Mark Willes firmly believed that the Chandler trust would ban the sale of the paper until the last Chandler heir died. Park’s “no comment” stunned Wolinsky. He’d been at the Los Angeles Times for nearly twenty years, edited or worked on stories that had won fourteen Pulitzers, helped staff members through the things that hit all workplaces—nasty divorces, premature deaths, unfaithful spouses, drinking bouts, too much dope. The Los Angeles Times was his family. And now the very real possibility that the Chandlers would sell out to a bunch of people from Chicago who reputedly ran newspapers the way a butcher ran a meat market loomed large. Wolinsky realized the very real possibility of a buyout. “All of a sudden one of the premier establishments in LA was going to be owned by someone from Chicago. . . . It certainly was the end of an era,” he said later.

Wolinsky’s surprise at the news was nothing compared to Willes’. As the company’s CEO, he should have known if his company were about to be sold, but he didn’t have a clue. The last time Willes had even heard about the subject was following his meeting with Madigan in San Diego. He’d reported Madigan’s approach to his board and did a quick analysis that concluded a deal didn’t make economic sense. “I reported that to John and I thought that was the end of it. I mean I liked John, and I thought he was being entirely up front. It never occurred to me that he would do anything behind my back. I certainly underestimated him,” Willes recalled.

Soon after Wolinksy had taken his stroll with Parks, William Stinehart, a lean no-nonsense Chandler family lawyer, paid Willes an unexpected visit. “He walked into my office,” Willes recalled, “and said that we’d reached an agreement to sell the company. I had no hint at all. I was so incredibly naïve. And I was so stunned and so angry. I think it’s the first time and the only time in my life I refused to shake someone’s hand when they left my office. It was just incomprehensible after all we had done that they would do this for the sake of a short-term gain. To this day, it’s incomprehensible. I felt totally betrayed.”

It was also news to the non-Chandler directors on the company’s board. Although the transaction was portrayed as a merger of Times Mirror and Tribune Company, it had all the earmarks of a hostile takeover by Tribune and the Chandlers. Skip Zimbalist, who had just become the Times Mirror CFO, said Willes came into his office looking white as a sheet: “He told me that Tribune wanted to buy it. He was visibly shaken; he looked totally shocked . . . like he’d been hit by a truck.”

Although Willes had done the Chandler family bidding, the Chandlers didn’t like the way he ran around acting like he owned the Los Angeles Times. The family owned the Times. As Zimbalist saw it, Willes had numbered his days when, without consulting the family, he named himself publisher and later appointed Downing publisher after he had been told he couldn’t have both the publisher and CEO titles.

And then there was the Staples scandal. In the drive to eliminate the wall between the editorial and the business side of the paper, Downing had cut a partnership deal with the Staples Center, a $400 million sports and entertainment complex in downtown Los Angeles. To meet part of its commitment to the deal, the Times had agreed to publish a thick, 168-page Sunday magazine in October 1999, touting the center—an edition that lured $2 million worth of advertising. On the surface, there was nothing wrong with the Staples deal. Newspapers routinely run supplements full of puff pieces to lure ad dollars that support serious journalism elsewhere in the paper. But the Staples deal exposed Downing’s inexperience as a publisher: As part of the deal, the Times had agreed to split $2 million of ad revenues with the Staples Center. Soon, the outraged staff at the Los Angeles Times denounced the deal publicly. “A fundamental premise of journalism is that a journalist should not be sharing revenue or have a business relationship with somebody he’s writing a story about,” Henry Weinstein, a highly regarded Times reporter told PBS. “Our own code of ethics for reporters specifically forbids this. What we saw in this deal was that the people who run the newspaper had done something that just flagrantly violated our own rules.” The Staples faux pas became a huge story, one that deeply embarrassed the Times and, by implication, the Chandlers, to the rest of the publishing world.

Zimbalist noted:

Staples could have happened to anyone. Kathryn had no publishing experience and she apologized and it was going to blow over until someone leaked it to the New York Times. The editorial department grew up under Otis and Tom Johnson and Shelby after him believing that their mission was to create the greatest newspaper in the world and be equal to the New York Times. Winning Pulitzers was important to them. Doing important journalistic work and scooping everyone—nothing was better. Anything that infringed on their ability to do that was a cause for anger, alarm, and rebellion. When their brethren at the New York Times criticized them, they felt they had to uphold their honor and they got really mad.

“You know I got blamed for Staples,” Willes said, “and I had nothing to do with the Staples thing, they didn’t ask me, they didn’t consult me. I didn’t know about it till after it become a problem.” But Willes had made Downing the publisher, a move that he admits in retrospect was a mistake. She wasn’t ready to become publisher, and the criticism fell upon the man who had put her in the job prematurely.

“Mark Willes is just a symbol—and perhaps even a victim—of the combination of fear and ambition that in recent years has led many managers of media enterprises to put stockholders ahead of readers or listeners,” wrote Max Frankel, a former managing editor of the New York Times, in an op-ed piece that compared the Staples deal to a kickback scheme designed to generate positive coverage. “By giving priority to stock values and profit margins, they slighted their obligations to the public. Indeed they have shown themselves ignorant or even contemptuous of the ethical standards so long and painstakingly erected to protect the credibility of their news operations.”

Even Otis Chandler broke his silence. From his retirement ranch north of Los Angeles, he released a statement that he had Bill Boyarsky read in the newsroom, calling the Staples deal “unbelievably stupid and unprofessional” and the Willes and Downing era “the single most devastating period in the history of this great newspaper.” In an incredible instance of self-flagellation that could only be found in the newspaper business, the Los Angeles Times had media writer David Shaw write a thirty-thousand-word piece on Staples.

As the Staples scandal lingered in the collective journalistic memory, a short, stocky man with a winsome smile deplaned at O’Hare International Airport and made his way to downtown Chicago for a board meeting of Classified Ventures, a collaboration between Tribune and other major media companies dedicated to combating the threats that the Internet posed to the industry’s lucrative classified advertising business. A native of Evanston, Illinois, Tom Unterman was about to leave his job as CFO of Times Mirror in 1999 to pursue his new career managing money, mainly for the Chandler family, but also some other clients. To those who knew him, Unterman was a “smart off the charts” lawyer and deal guy who had a reputation for cleverly avoiding taxes. Just before the board meeting, Jack Fuller, who by then had been promoted to head Tribune’s publishing unit and a fellow Classified Ventures board member, pulled him aside: “I told Tom ‘we are not going to give up on this. This is the smartest thing either of our companies could do,’” a not-so-veiled reference to the proposed Tribune–Times Mirror merger.

Unterman listened to Fuller and said nothing in reply, until a few months later at another board meeting when he told Fuller that “things were changing in Los Angeles and that he might be able to do something.” The Chandlers, Unterman said, might be interested in a deal. Fuller then immediately informed Madigan and David Hiller, the original advocate of a Tribune–Times Mirror merger, and shortly thereafter Unterman had a meeting with Fuller and Hiller.

In Chicago a few weeks later, Fuller set up a meeting at Madigan’s North Shore home to discuss possibilities. The Chandlers, Fuller learned, were far more embarrassed by the Staples scandal than anyone realized. “Tom said the Chandlers realized they couldn’t get much more out of Times Mirror through cost cutting and were angry and embarrassed by Staples. They wanted to find new leadership [for Times Mirror],” Fuller recalled.

One of Unterman’s clients had sent him a copy of News Values, a book Fuller had written in which he argued that newspapers had to maintain a strong ethical backbone despite the economic challenges the industry faced. Unterman had confidence in Fuller, and the Tribune publishing chief impressed the Chandlers, too. When Unterman began to work his magic, things moved quickly and quietly.

“We went there first, and then they [the Chandlers] came here to the Tower,” Madigan recalled. A string of clandestine meetings unfolded at the Sidley Austin law offices and the California Club in downtown Los Angeles. Willes was deliberately left out of the loop. “They [the Chandlers] didn’t tell Willes, and they didn’t tell the other directors,” Madigan explained. “They had all of this control [of Times Mirror], they had that high voting stock. They could just do this.” Willes had made Unterman’s job easier with his political naïveté. The steady stream of changes in his executive suite meant he had few longtime allies watching his back. Unterman, on the other hand, had solid ties to the family, a cunning mind, enough political smarts to fill the Grand Canyon, and good relations in his native Chicago.

Madigan and Fuller were hungry for a deal with Times Mirror though, and Merrill Lynch, Tribune’s longtime investment banker, didn’t pull down big fees sitting in the financial bleachers. The Tribune Company was known as a careful, plotting outfit that maintained a steady lumber, not a quick step. Madigan and Fuller were determined to reverse that image. As events played out after Thanksgiving in 1999 and into the new year, both sides moved quickly and secretly, lest anyone discover a deal was in the works.

In a move that surprised no one, the Chandlers had structured the terms of the merger to benefit their family, at the expense of minority shareholders. Overall, the Chandlers’ holdings gave the family 28 percent of all Times Mirror shares, but the family could still control Times Mirror, because their stock enjoyed super-voting status. In effect, Chandler stock was worth ten votes per share, while regular stock received only 1 vote per share. The price Tribune was willing to pay turned heads. Madigan and Fuller’s deal initially offered $92.50 per share to Times Mirror stockholders for shares then changing hands at about $47, a premium of nearly 100 percent. But, as Willes, Zimbalist, and non-Chandler directors soon learned, the family intended to exchange their Times Mirror stock for shares in Tribune, a move that would make the transaction tax-free to the Chandlers, while everyone else would get what was left of the stock pro rata, and the rest in cash.

The end result? Non-Chandler stockholders would be responsible for paying income taxes on their profits. By March 2000, Madigan and the Chandlers sprang the news on everyone. As Willes recalled, “John and his people came in to make a presentation to our board about why this was such a wonderful combination. They talked about their television ventures, you know, Buffy the Vampire Slayer and all that. I just sat there and thought, this can’t be happening. I didn’t know whether to sit there and cry or stomp out of the meeting. Fortunately I did neither.”

Zimbalist explained:

It was a pre-cooked deal. After the meeting with Mark, we had a board meeting, and the Chandler representatives confirmed it. We lined up a committee of the independent directors and hired Goldman Sachs to advise us. Our objective was to make a good deal and make sure all shareholders got as good a deal as the Chandlers. The Chandlers and the Tribune guys were trying to ram the deal down everyone’s throat. The Tribune people were very directive and arrogant, telling us we had to do this and had to do that, ... that by law and precedent, if the controlling shareholder wants to sell, the board can’t stand in the way. They were friendly with the Chandler directors but hostile to everyone else. The independent directors were irate that the Chandlers hadn’t told them about the deal. The deal also had a “no shop” clause that said we couldn’t seek other offers. That rubbed the independent directors the wrong way. Everybody had lawyers and investment bankers working on this.

Zimbalist and independent directors met in secret, too, to determine what to do: “We were trying to get some leverage, and we were looking at everything when all of a sudden this paralegal, a young woman, comes in with a big smile on her face. She found a clause in the charter of Times Mirror Corp. that said super-voting shares could not be voted as super-voting shares in a change of control. This meant they [the Chandlers] couldn’t dictate the terms.”

An atmosphere of smugness prevailed in the downtown Los Angeles offices of Sidley Austin when Zimbalist, a clean-cut, steelgray-haired man, walked confidently into the conference room armed with his fresh intelligence about the company charter:

We had an agenda and time table. Tom Unterman was there and a lot of other lawyers. I was a brand-new CFO. So I said, before we get to the normal agenda, I just want to say that we may have to slow down the process a little bit because we have to go out and see if we can get other bidders.... They all looked at me in this condescending way. They told me this is a “no shop” offer, kind of like this is the way things work in the real world, sonny. And I said, well, that doesn’t take into account Article 16 or whatever it was in the charter because it says the super-voting shares go away in these circumstances. Everyone stopped and looked at Tom and then they asked for an adjournment. It was kind of a beautiful moment. We slowed it down, changed the terms, and we did shop it around to two or three companies.... We showed it to Newscorp, the New York Times Company. But no one else could move fast enough. The tax structures we had in place were complex. Tribune used the same audit firm that had sold us these structures, so they were comfortable with them. We delayed things, but at least we felt we had tested the waters. We got the price up a little bit and we improved the terms.

On March 10, 2000, Tribune started “management interviews and due diligence,” the proxy said, scrutinizing the details of the proposed deal and looking for problems, a process that should take months. On March 12, two days later, the Tribune and Times Mirror boards approved the deal. The Chandlers made quick work of Willes. Once the deal was agreed upon, Willes wandered the halls of the Times Mirror building. “He would cry very easily,” Wolinsky remembered. “It was waterworks for the rest of the time he was there.”

During Willes’ tenure, the Times circulation rose, its operating profits soared at a compound rate of 25 percent, and earnings per share increased more than 50 percent. Some industry executives credited Willes with forcing a hidebound industry to face up to declining readership and a dubious outlook for long-term revenue. Willes raised some important issues, too. “Tom and everybody else were talking about putting our content online for free, and somehow make it up on the ad side. And I said, let me give you something to think about. If you are going to give away for free what you stand for, then what kind of message are you sending? It’s a message I don’t think you want to send,” Willes noted.

But Unterman, who felt the Internet was the future, worried that Willes devoted too much effort and resources to increasing newspaper circulation, which would continue to fall regardless of what the industry did. In addition, Willes had sacked 2,000 people and presided over a revolving door in his executive suites. When he left Times Mirror—only after loading the last of the Diet Coke in his fridge into the back of his car—Willes walked away with a severance package worth $64.5 million. For his part, Unterman, who by then had formed Rustic Canyon Partners—a company that would manage the Chandler family wealth—earned an $8 million dollar fee for working both sides of the transaction behind Willes’ back.

As word reached Chicago on the evening of March 12, 2000, that a group of high-level Tribune executives (including Hiller, the executive in charge of Tribune’s development arm) were in Los Angeles, Lipinski and I headed into the Tribune Tower. Rumors had hardened enough for Tribune media writer Tim Jones to work up the story all weekend and prepare a draft. Lipinski and I began calling sources, trying to confirm the rumors and pry details from tight-lipped Tribune executives, whose reluctance to talk convinced us something was up. As we speculated on how the deal would work, John Puerner, publisher of the Tribune-owned Orlando Sentinel, took our call and heard us out. He was out in Los Angeles as part of the deal team, but said he couldn’t talk. He promised to call back, though, and at about 10:30, Puerner phoned and told us we were good to go; we could publish our story.

The headlines the next morning stunned the industry. Tribune had acquired Times Mirror for $95 a share in cash and stock, a price that, in retrospect, would prove to be far too high. It was the largest deal in newspaper history, a combination of resources that made Tribune Company the third-largest media powerhouse in the country after Gannett Corporation and Knight Ridder. The difference was Tribune had hands down the best collection of quality newspapers in America: the Chicago Tribune, the Los Angeles Times, Newsday, the Baltimore Sun, the Hartford Courant, the Orlando Sentinel, the South Florida Sun-Sentinel , the Morning Call in Allentown, Pennsylvania, the Newport News in Virginia, and several small suburban papers just north of New York City that sold a combined 3.6 million newspapers every day. By then, Tribune Company had successfully acquired twenty-two television stations, making the broadcast wing of Tribune as large as a network with viewers in 38.4 million households in America, including stations in the nation’s three largest markets, New York City, Los Angeles, and Chicago. “Frankly,” Madigan wrote in a memo to employees that day, “the newspaper industry is consolidating, and the only way to survive and prosper in the face of this trend is to have greater size and scale.” Madigan explained that Tribune wanted to blend Times Mirror’s journalistic prowess with its broad media reach and realize synergies that would pay for the transaction: “A major portion of the value creation from this combination will be derived from faster revenue growth in our media businesses.” He predicted that by 2005, revenue growth combined with expense savings would generate an additional $225 million in cash flow. The combined company’s Internet audience would total 34 million, bigger than the websites of the New York Times and USA Today combined.

On March 13, Hiller stood before the glass-walled offices of Sidley Austin, looking at the grubby streets of downtown Los Angeles below. Madigan was on the phone with Chicago Mayor Richard Daley, personally briefing him on the merger. His picture would soon grace the cover of Business Week magazine, and stories about Madigan and Fuller would fill pages of the Wall Street Journal, all because of an idea that Hiller had proposed the year before. Times Mirror stock had jumped 75 percent that day, rising almost $38 per share to close near $95 per share. Michael Costa, Tribune’s investment banker at Merrill Lynch, walked over to Hiller, warily eyeing the minute-to-minute trading stock on his BlackBerry. “He looked up at me and said the market is having a little difficulty with our deal,” Hiller later recalled. Tribune stock, which once had been valued at over $60 per share, had plunged to $27.75. As Hiller watched cars snake by on the streets below, Madigan approached and took in the underwhelming view. Glancing at Hiller, he looked at him and, without missing a beat, deadpanned, “Should we jump?”