The Deal from Hell

Anybody watching the Weather Channel in the summer of 2005 knew that New Orleans would be hit by Hurricane Katrina. Nobody guessed how bad it would be, though. My son, who lives forty miles west of the Crescent City, called me from Houston, Texas, to tell me his flight home had been canceled. He’d rented a car to try to drive home, with the hopes of beating the storm. I protested to no avail and grew increasingly worried as reports of the storm’s unyielding force flowed into the Chicago Tribune newsroom.

Covering a natural disaster like Katrina challenges any newsroom: It’s a scramble to find reporters and photographers hotel rooms, communications in ferocious weather are strained at best, and the general tone of a city under environmental siege is one of unease. Katrina was a special case, though, and not just because I feared my son had wandered into the eye of the storm. The fallout from the disaster exposed a persistent vein of racism that shocked many Americans, scattered the poor to points near and far, and shattered the nerves of an already stressed and corrupt police force in New Orleans.

Big newspapers across the country reacted quickly to get the most out of the story. At the Chicago Tribune, we immediately dispatched Howard Witt from our Houston bureau and Lisa Anderson, who had become New York bureau chief and a seasoned natural disaster reporter. Working in tandem, Witt and Anderson secured necessities like maps, headlamps, and waders, set up an emergency newsroom, booked cars, established cellphone reception, located supplies, and found a house we could rent temporarily, all the while filing stories and briefing editors back home on the lay of the land. Tribune editors in Baltimore, New York, Orlando, and Los Angeles reacted similarly as the casualty toll mounted. Everybody, including Gerry Kern high up in his Tribune Tower office, swung into action. In New Orleans, Kern saw a tremendous opportunity.

Over the next couple of months, Tribune journalists would share scarce rooms, eat meals at their laptops, work sixteen-hour days, and spend weeks away from their families, as Kern began compiling the raw material for “Hurricanes Katrina and Rita,” his 2005 report about “Tribune’s coverage of the big storms and the implications for future national coverage.” It was an impressive document that in twenty-two richly colored pages detailed how many stories each Tribune paper ran on Katrina and Rita, what percentage of those stories were written by staff, and what percentage by writers from papers in the Tribune family. Kern examined what percentage of papers covered common themes, and counted stories by topic (there were ninety-nine stories covering hurricane evacuation and shelters but only ten on pets, zoos, and aquariums). An appendix detailed that the Los Angeles Times received 97 percent of its stories from its staff at the site of the disaster, while the Orlando Sentinel got 30 percent of its stories from staff in the disaster zone. Kern gave his Tribune bosses a report card that told them what they wanted to hear: While coverage from Tribune reporters was good, there was a need to “leverage [Tribune’s] scale and talent.” The media would later be criticized for exaggerating the Katrina debacle. With their own reporters on the scene, papers like the Chicago Tribune had questioned the accuracy of those reports from wire services and other sources. But Kern focused his report on the duplication of effort, and not on the content of reporters at the scene.

Baquet had settled in as editor of the Times, and we had joined forces in an effort to deal with some of the legitimate issues that Kern raised. We all understood we could save the company money with commonsense steps like collaborating to limit the number of people each paper sent to cover a story. But we also knew that cooperation had its limits and, despite what Kern thought, could compromise the quality of our news reports. Our main goal was to limit the centralization of news coverage championed by Kern and others at Tribune Publishing. We didn’t want to hurt smaller papers with foreign and national news staffs like Newsday and the Baltimore Sun. But this was every newspaper for itself, and Baquet and I came up with a plan to cut the foreign and national staff 20 percent by phasing out numerous foreign and national bureaus at the smaller papers, forcing them to rely on the Los Angeles Times and Chicago Tribune for coverage. This was not fun, but all Tribune papers faced enormous challenges as revenue started to dry up and the company’s stock price sunk. We understood that the mission at hand was to maintain the integrity of our newspapers.

In Los Angeles, Baquet was sitting on a powder keg. He was a charismatic man who was popular with his staff, but there was a lingering sourness over how Carroll had been forced out of the organization, despite his claim, upon stepping down, that he was doing so to spend more time with his family. Times employees had had it, and in a survey conducted by an outside research firm, they let the Times editors know just how disheartened they were. Although the Los Angeles Times newsroom viewed itself as the lone voice of journalistic dissent, the Tribune Company policies also angered Chicago Tribune journalists, but the anger was not as public as in Los Angeles, where Kevin Roderick, a former Los Angeles Times reporter who had started the blog LA Observed, had a pipeline into the newsroom.

In the fall of 2005, for the first time in decades, I had to lay off a handful of employees at the Tribune. I started losing highly regarded reporters, like Jeff Zeleny, a brilliant young political writer whom I had hired from the Des Moines Register who left for the New York Times, and Jan Crawford, for my money the nation’s best legal affairs reporter, who went to a national network television job. Baquet and I fought cuts and knew that keeping star reporters would be much harder without a robust foreign and national news staff. But the problems that we faced paled in comparison to the bad news that started to engulf FitzSimons.

The first dose came courtesy of the due diligence in the Times Mirror deal led by Hiller and Tribune’s general counsel, Crane Kenney. The proxy on the deal suggests it had lasted only two days. As noted earlier, Times Mirror had sold the Matthew Bender & Company, a legal publishing subsidiary, and health science publisher Mosby, Inc., for more than $2 billion. Times Mirror had structured the convoluted sale as a tax-free deal that allowed the company, then controlled by the Chandlers, to avoid federal income taxes. But the IRS had challenged Times Mirror’s handiwork, and Tribune inherited the dispute when it bought the company. Tribune knew what it was getting into and could have paid the tax and applied for a refund, thereby avoiding the IRS’ substantial interest and penalties. Unterman said he told Tribune Company that that was the strategy that Times Mirror had planned to follow. But given the optimistic revenue projections that underpinned the deal, Tribune considered the Bender case an acceptable risk. Bad bet. In September 2005, the Tax Court ruled that Tribune owed the government $1 billion in unpaid taxes, interest, and penalties. Chagrined, FitzSimons said the company would pay the $1 billion and appeal. Wall Street pounded Tribune’s already depressed stock price. (Eventually the case was settled with Tribune paying about $650 million in taxes and penalties.) But the Bender case was just the start.

At first, relations between the Chandlers and the management in Chicago had seemed cordial. Soon after Tribune purchased Times Mirror, three Chandlers and Unterman took seats on the Tribune board. However, about a year after the deal was closed, Madigan kicked Unterman off the board because Tribune needed more people with CEO pedigrees. From day one, Unterman, a Jewish Democrat, thought the Tribune board, which was packed with Madigan’s friends, was insular and suspicious of anyone who wasn’t white, Irish, Catholic, and Republican. It soon became clear that Tribune board members were determined to keep control of the company in Chicago at all costs. Unterman warned Madigan that he might one day need someone on the board that had a good relationship with the Chandlers. But Unterman said Madigan ignored the advice.

The Chandlers became concerned with the slide in newspaper stock prices in mid-2005. To diversify the family’s investment in Tribune, the Chandlers wanted to carefully unwind two trusts that had been established earlier to increase their dividends and avoid taxes. They had a lot riding on the timing of the transaction and the financial valuations that would be placed on the assets in the trusts, which included real estate headquarters for most of the Times Mirror papers and some Tribune preferred and common stock.

The Chandlers’ negotiations with Tribune about how their trusts could be skillfully handled involved a range of proposals. But they soon found themselves locked in a disagreement with FitzSimons that turned bitter. FitzSimons said the Chandlers wanted to place valuations on the assets in the trusts and time their dissolutions in a way that would minimize the family’s taxes at the expense of Tribune shareholders. Smarting from the $1 billion welt the company had suffered in the Bender tax case, the non-Chandler Tribune board members said no way.

The dispute came to a head in May 2006 when FitzSimons and the Tribune board authorized a “leveraged recapitalization” or “Dutch auction” in which the company would buy back up to 25 percent of its stock from shareholders for up to $32.50 a share. Managers typically engineer buybacks to goose a company’s reported earnings by retiring stock so profits can be spread across fewer shares. It is a tactic largely viewed as an alternative for weak managers who, in the words of one Tribune executive, “are not looking out for our tomorrow.”

But the move infuriated the Chandlers, who thought the recapitalization was a bad idea and a move that would jeopardize the value of the assets in their trusts. “It was like giving the Chandlers the finger,” Unterman said. So the Chandlers trotted out the family lawyer, William Stinehart, who publicly filed a blistering eleven-page critique of the company, its management, its board, and its lack of strategy that, in effect, put the company up for sale. “It’s the beginning of the end game,” Edward Atorino, a stock analyst at the Benchmark Company, told reporters.

In the spring of 2006, Newsday hit the news again when Sito, Brennan, Czack, Smith, Garcia, and four others pleaded guilty in the U.S. District Court to a range of fraudulent circulation practices. Judge Weinstein didn’t sentence anyone, though, because they had begun cooperating with Banar’s investigation as she continued to scrutinize the upper reaches of the company, particularly after the judge raised questions about how such a substantial fraud could take place without the knowledge and culpability of higher authorities at Tribune.

Even journalists accustomed to a heavy diet of news had a hard time digesting the developments at Tribune Company and keeping their focus on their jobs. In August, Kern convened a meeting with Baquet, myself, Earl Maucker, the editor of the Tribune-owned Sun Sentinel in Fort Lauderdale, and a couple of others to discuss—you guessed it—“working together.” Kern held the meeting at Maucker’s paper in Fort Lauderdale.

A native of Alton, Illinois, Maucker, the Sun Sentinel’s longtime editor, was a go-along kind of man who lived in a huge, gorgeous house. He took us to dinner in his yacht, The Final Edition, which docked at a pier in his backyard. The paper he ran did some excellent investigative reporting, but Maucker bought FitzSimons’ line of mixing marketing and local news with a heavy emphasis on parochial stories. After dinner, we cruised the canals around Fort Lauderdale, smoked cigars, and had drinks on a delightfully pleasant night. We were there to discuss foreign and national news collaboration (otherwise known as budget cuts), but most of the discussion revolved around the turmoil engulfing Tribune, as we swapped rumors about who in the upper reaches of Tribune would survive and who wouldn’t.

Baquet and I had arrived early to have dinner in Miami the night before and to talk strategy to ward off the centralization that Kern was championing with the support of Scott Smith, who had succeeded Fuller as head of the publishing group. “If I tell Scott that I won’t make any more cuts, do you think he will fire me?” Baquet asked. (Smith’s philosophy was to push managers until they reached their limits.) “No,” I reassured him. “He will just keep pressing you to agree to cuts and will quit when he thinks he got as much as he can get.”

Later I asked Baquet if he had indeed resisted Smith’s pressure for more cuts when he had returned to Los Angeles. “I did,” he replied. “I felt pretty good about it, although I don’t think Scott did. I told him I wasn’t going to cut anymore. I then got up, walked over to him, shook his hand, and said, ‘You have to do what you have to do, and I have to do what I have to do.’ I then walked away and he just kind of sat there and slumped in his chair.”

Meanwhile, FitzSimons discovered that his problems weren’t limited to the breakdown in the talks with the Chandlers. In the midst of his fight with the family, he learned he had prostate cancer and had to check into a hospital to deal with his health. Once FitzSimons had recovered from his surgery, private talks with the Chandlers resumed as the family started proposing scenarios in which the company would either be broken up in tax-free spinoffs or sold at a premium at a time when buyers of newspapers were about as plentiful as Dead Sea Scrolls. The Tribune had said it would find another $200 million in budget cuts to help repay the $2 billion it had borrowed to buy back stock, and Smith started seeking plans to implement the cuts when another bomb dropped.

The headline in the New York Times of September 15, 2006, said it all: “Los Angeles Times Editor Openly Defies Owner’s Call for Job Cuts.” The day before, Baquet had gone public with his opposition to more budget cuts in a Los Angeles Times story, and his publisher, Jeff Johnson, had backed him up. “Newspapers,” Johnson said in a quote that infuriated Smith and FitzSimons,“can’t cut their way to the future.” Gambling that the Tribune Company wouldn’t fire him, Baquet reiterated that he was not opposed to cuts. “But you can go too far,” he said, “and I don’t plan to do that.” The simmering tensions between Tribune and its largest paper had reached a tipping point. I called Baquet to voice support but also to warn him that taking the controversy public placed him in uncharted waters. Smith and FitzSimons summoned Johnson to Chicago, berated him for his comments, and offered him an opportunity to back down. Johnson declined the offer and headed back to Los Angeles. He had, in the words of the Times columnist Steve Lopez, “drunk Baquet’s Kool-Aid.”

A week later as the Tribune board met to hear about FitzSimons’ compromise plan to deal with the Chandlers, the New York Times ran a September 21, 2006, story entitled: “At Los Angeles Times, a Civil Executive Rebellion.” With that headline, the Los Angeles Times newspaper and boardroom became a national stage in a fight between editors and owners of newspapers: “Would Mr. FitzSimons fire Mr. Johnson and Mr. Baquet and risk a full-scale revolt at Tribune’s largest property?” the Times story asked. “Or will he try to smooth things over and thereby risk undermining his authority with other Tribune editors and publishers?” The fight was on.

A group of twenty Los Angeles civic leaders had written a letter to the Tribune voicing concerns about budget cuts and calling on the beleaguered company to invest more money in the paper or sell it to someone who would. Baquet clearly wanted to rally support for the paper during a time of intense pressures, not only in Los Angeles but across the country. The Washington Post, the New York Times, papers in Dallas and Akron, Ohio, all had announced layoffs and buyouts as they struggled with the demands of Wall Street investors and the changing habits of readers and advertisers on Main Street. As prospective buyers like Broad and Geffen circled the Times, the newsroom circulated petitions voicing solid support for Baquet. Most of the editorial department signed them. The staff commissioned Baquet T-shirts, and rumors emerged of a “suicide pact” between Baquet’s top three aides, managing editor Doug Frantz, features editor John Montorio, and managing editor for readership and production Leo Wolinsky, all of whom had reputedly agreed to resign if Baquet were replaced.

On November 9, 2006, the New York Times ran yet another story, one that carried ominous implications for Wolinsky: “David Geffen spends more time schmoozing with an elite cadre of journalists than just about any other mogul in Hollywood,” the Times article read. “The billionaire often invites them to his sprawling estate in the heart of Beverly Hills, where De Koonings and Pollocks hang on the walls. In September, his guest was Leo Wolinsky, a managing editor of the Los Angeles Times, and they approached the delicate question of whether Mr. Geffen might try to buy the struggling newspaper.”

FitzSimons had already expressed his disregard for Wolinsky. When he’d arrived, Baquet had wanted Frantz to be his managing editor for news and had moved Wolinsky aside, putting him in charge of the things that Baquet didn’t have time for or didn’t like to do—the mechanics of producing the paper. He had asked Wolinsky to investigate the papers’ slide in readership and what it would take to reverse it. Having someone in place to tackle readership issues pleased FitzSimons, and he told Wolinsky to call Kern to have him line up several readership experts to interview. “I didn’t need Gerry Kern to make phone calls for me. I could do that myself,” Wolinsky recalled. “I actually called every one of the people that Dennis mentioned, but when he asked Kern if I had called him, Kern said no.” In point of fact, Wolinsky did a thorough report on the Times readership and circulation problems, which he presented in writing. And he organized a one-day off-site meeting for top Times editors at his house to discuss the issue. But no one made FitzSimons aware of the effort. He thought Wolinsky had ignored him—something akin to mortal sin. “That’s when I got on his bad side,” Wolinsky recalled. The New York Times article simply hardened FitzSimons’ views about the Los Angeles Times and Wolinsky.

In October, I wandered into the Tribune on the early side and sat down as usual in Lipinski’s office to discuss the morning paper and any potential problems looming on the horizon. “They’re going to ask you to go to LA,” she said abruptly. I told her there was no way I would do that, and she responded that it was up to one of the two of us to go. Lipinski said there were two big papers in the company and each of us would have to run one of them. Hiller had asked her to go to LA, but she felt that would create change and stress in both newsrooms. “I suggested it was better to let me continue on in Chicago while you went to LA,” she said. The situation in LA was considered impossible in many newsrooms across the country because of the public nature and intensity of the dispute between Baquet and Johnson and their bosses back in Chicago. I remember thinking, nothing is impossible, and felt a stirring inside me that responded to daunting challenges. But the situation was complicated. Dean Baquet was a friend of Ann Marie’s and mine and neither of us wanted to do anything to undermine him. When Lipinski asked if I would just have breakfast with Hiller, then publisher of the Chicago Tribune, I agreed but only to discuss the situation (not my possible transfer) and give him my opinion about what was happening in LA.

The next day, a cloudy October morning, we sat down together at Chicago’s Intercontinental Hotel. We got right down to business. Hiller told me the Tribune planned to replace both Johnson and Baquet and that he would soon be leaving to become publisher of the Los Angeles Times. Everyone, he said, including FitzSimons agreed that I should replace Baquet. He then asked if I would agree to be an “acting editor” of the Times. I let him know in no uncertain terms that I would not talk about Baquet’s job behind his back—he needed to deal with Baquet, not me. And second, if he and Smith were looking for someone to go out to Los Angeles to cut the staff, they should get someone else, because I would not do it.

Hiller then asked me if I would consider joining him if he and Baquet couldn’t work out their problems. I reiterated that I would consider it only after he dealt with Baquet. I agreed to meet with Smith on Monday and give him my perspective and to provide Hiller with an objective, written critique of the strengths and weaknesses of the Los Angeles Times from a journalistic perspective, regardless of who was the paper’s editor. Before the breakfast ended, Hiller gave me his word that he would try to work with Baquet if I would agree to consider the job should the two men fail to see eye to eye about the paper’s future.

On Monday, I advised Smith to back off on plans to fire Johnson and Baquet. I thought it would be a public relations disaster. I offered to go to Los Angeles and iron out a compromise plan to smooth things over. “Do they both have to go?” I asked. Smith replied: “Jeff has to go. Dean doesn’t, but Jeff for sure.” He and FitzSimons felt that Johnson’s refusal to issue a statement rescinding his hostile position sealed his fate. But it was clear to me that Smith was thinking of replacing Baquet. Referring to a tolerance for budget cuts, Smith said, “We all reach our limits.” When that happens, Smith firmly believed that a change in leadership was needed. He told me the company needed someone with strong journalistic credentials to settle down a rebellious newsroom. He allowed that Kern had suggested he become the editor, but Smith had told him he would be “toxic” in the Los Angeles Times newsroom. “We’re depending on you to do this, Jim,” Smith said. But in the next breath, he said he would give Hiller a shot at working with Baquet.

I left the meeting and called Baquet, who asked if I had any intelligence on what was going on in Chicago. I put my cards on the table: “Something’s going on, my friend. They just offered me your job, and I’m going to tell you what I told them. I told them I wouldn’t talk about your job behind your back. Jeff is out. Hiller is going to replace him. I think you should work with them because your paper is not going to be better off if you leave.” Baquet, rather generously, said he would support my appointment as editor in Los Angeles if that’s what it came to, but that he would try to work with Hiller in the meantime, even though he doubted it would work out. “If I were you,” he said, “I’d get my beach shorts ready.”

Hiller had already left for Los Angeles to attend a black-tie celebration of the Times’ 125th anniversary. The next day, he replaced highly regarded Johnson as publisher, just as Johnson learned that his wife had been diagnosed with breast cancer. Hiller and Baquet met for breakfast. When the waitress asked them what they wanted to drink, Baquet jokingly said Hiller would have some Kool-Aid. Both men laughed. Back in Chicago, FitzSimons summoned me to his office and pulled out the lengthy critique of the Times that I had written for Hiller. Again, I said that I wouldn’t talk about Baquet’s job behind his back, but it was clear that he was interviewing me for the editor’s job. “Tell me,” he asked, “what do you think of Leo Wolinsky?”