With Knight-Ridder and Tribune Under Their Belts, Investors Are Targeting Management Changes At “The Gray Lady”; They Won’t Win At The New York Times, In The Short Run At Least, But Usually Gray Faces May Turn Red

What’s at issue is that under the dual class system the Ochs Sulzberger family controls nine of 13 seats on the board of directors through its 738,810 B shares. The 6.5 million A shares are owned by everyone else but they control just four board seats. So what the family wants, the family gets.

Now institutional shareholders, who usually invest for the long-term, did not invest in the New York Times Company without understanding all this. They accepted it because at the time most newspaper industry investments were earning ok profits and the Times was doing just fine. But recent years have been disastrous for newspaper shares in general and at The Times Company the shares are down about one-third over the past two years. The institutional holders have not been happy with all the management decisions of late – like building its new 52-story glass palace at a time when money was tight, but they are sub leasing more floors than originally planned – and they believe management and corporate governance changes are needed, but they are powerless by the two-tier system to get those changes enacted.

What specific changes? Well for one they believe that Arthur Sulzberger Jr. who is currently chairman and publisher of the New York Times should give up one of those positions. “No thank you,” says Mr. Sulzberger and the 6.5 million A shareholders get outvoted by the 738,810 B shareholders. The A shareholders don’t like the fact that only The B share board directors serve on the compensation committee. So the family decides what the family members will earn. Cozy. The company says it is rotating the A share members onto the committee, but it will still be controlled by the B share holders.

The A shareholders don’t like that that Michael Golden, vice-chairman, a family cousin, and publisher at the International Herald Tribune in Paris “is among the most highly compensated executive officers of the company, yet isn't accountable to shareholders,” according to Institutional Shareholder Services (ISS).

ftm background

What Does It Take To Get A Newspaper’s Share Price Up? Well, Market Rumors That Warren Buffett Might Be Interested In Taking A Stake Is Better Than Share Buybacks, Higher Dividends, Or Just About Anything As The New York Times Just Learned
A strange thing happened on Wall Street Wednesday. The New York Times’ shares that have been languishing near yearly lows suddenly jumped some 7% during the trading day, and by the close had held onto a 3.8% increase. All it took to get the shares moving were two words “Warren Buffet”

It’s Official, At Least In France: Newspapers Are Charity Cases
France has always had a tradition of very heavily subsidizing its newspaper industry -- in the 2007 budget €274 million is allocated, a 22% increase over two years ago – but the French Culture Minister is worried that newspapers need even more help and so he has come up with a novel idea for reader tax deductible financial support.

If the Very Rich Businessmen Really Get To Buy Newspapers Like The LA Times and The Boston Globe Then Look Very Carefully At Their Financing -- If It’s Their Own Money Then Fine, But If Its Leveraged Then Watch Out
The problem with newspapers today is not that they are losing money, far from it. The problem is that is getting increasingly more difficult to maintain the type of margins they are used to and for publicly quoted companies that’s a real pain.

Just When It Looks Like Big Newspaper Investors Are Trying Anything To Get Out Of the Segment Without Losing Their Shirts, Up Comes Highfields Capital Management Buying A 5.2% Stake In McClatchy
Maybe newspapers aren’t such a bad buy after all? One big hedge fund with significant newspaper holdings has disclosed it has just taken a 5.2% position in McClatchy that is in the process of buying Knight-Ridder. And that same hedge fund, Highfields Capital Management (HCM) also has a $142 million (3.3% stake) stake in Knight-Ridder.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

On the other hand the company points to Knight-Ridder and Tribune, and how shareholders forced short term profitability measures on both companies instead of investing in the long-term, and says basically, “jolly good thing we have this two-tier system because it protects the company from the short-term whims of Wall Street.” And there is something to be said for that, but is there no middle ground like keeping the two-tier system but giving more importance to the views of the A shareholders?

It’s not that management has not been mindful of its A shareholders. They’ve tried share buybacks, they’ve added debt by buying back shares and by lifting dividends (a 31% dividend increase has been announced for June), earlier this year they sold off their nine TV stations for $600 million, and they made a big digital investment in about.com two years back for $410 million that a Morgan Stanley analyst says is worth three times that much today, and to control costs they have been cutting staff, even in the revered Times newsroom.

But management does seem to have a couple of blind spots, too. Take the Boston Globe which it bought in 1993 for $1.1 billion. Wasn’t long after that the New England business climate became very cold and the Globe has been cutting back on costs ever since. But late last year a group of investors led by former GE Chairman Jack Welch made soundings that they had valued The Globe at between $500- $600 million and they would be wanted to make an offer, but the Times management kept emphatically saying no. But they did bite the bullet eventually and revalued down their New England properties by some $800 million – most of that for the Globe – but still says it is not for sale.

In this environment far better to get rid of it to local business men at a fair price today and management can then concentrate on the mother ship, and besides the $600 million could be put to good use, let alone the tax breaks.

In the past there was not much such A shareholders could do about these types of situations, but the A shareholders are flexing their muscles. They can’t really get the Times to change what the family doesn’t want to change, but they can surely embarrass management in the eyes of the investment world.

It started a couple of years backs when Hassan Elmasry, who runs a London-based Morgan Stanley Investment Fund that owns 7% of the Times’ A shares suggested to Times management it might do away with its dual share system. That didn’t get very far the first year so last year the stakes were raised and nearly 30% of the company’s shareholders withheld their vote on the nominated board of directors. Functionally, It really didn’t matter but it was an embarrassment to management with those levels of shares withheld. Wall street saw a decided lack of management confidence.

Since that last annual meeting and this year’s scheduled for April 24, Elmasry has continued the pressure via a writing campaign with Sulzberger, the two have met, and Elmasry made a presentation to the board that surely must have left some faces rather red (in anger or in embarrassment?) Instead of complimenting the board on all of their actions for raising shareholder value, Elmasry damned them for poor shareholder return, declining circulation in New York because of its “national” policy, "poorly timed" buybacks, "overpaying" for About.com, falling credit ratings, let alone the share structure.

But at the end of the day, the company stayed adamant that the two-tier system remains. Not only that, the family removed its personal holdings from Morgan Stanley’s care. So there!

This year’s stakes are even higher. Elmasry has hinted he might withhold his votes but has not made a firm announcement. But two major well respected institutional shareholding advisory services have recommended that shareholders withhold their votes.

Institutional Shareholder Services (ISS) issued a report saying a strong message needed to be sent to the Times’ management, noting that shareholders had very few means to really voice their opinion except by withholding votes. And now Glass Lewis & Co., is making the same recommendation.

But whereas ISS supports breaking up the two-tier system, Glass Lewis takes the approach of “a little bit at a time.” It blames the two tier system for the poor share performance for the past couple of years, but rather than suggesting the two tier system goes – something it understands management is loathe to do -- it suggests the four A shareholder board members should take a far more active role in trying to improve corporate governance and keep costs under control.

What really seems to goad the A shareholders is that they have no real say on senior executive compensation (Sulzberger’s totaled some $4.4 million last year according to a company filing) and even if one A shareholder board member is put on the compensation committee it’s not going to make any difference. The shareholders also think the management structure would be far stronger if Sulzberger’s current positions of chairman and publisher were divided.

Glass Lewis has made that recommendation without recommending a breakup of the two-tier system but it does offer an ominous warning that the Times’ two-tier share system leaves “the control and voting power in the hands of a privately-held class of stock and further is a prime example of how the structure can result in lagging performance and insulate certain board members from shareholder accountability (read Sulzberger and Golden into that!)

Glass Lewis takes the view that the four A board members – William Kennard, former chairman of the Federal Communications Commission; Raul Cesan, founder and managing partner of investment firm Commercial Worldwide LLC, James Kilts, former chairman of Gillette Co., and Doreen Toben, chief financial officer of Verizon Communications, Inc – have not served the A shareholders well and should step down.

The Times’ response, as offered by Catherine Mathis, VP of communications, is that “we are disappointed in the Glass Lewis recommendation. We have an extraordinary talented group of directors who have experience and skills in a wide range of areas, including strategy, capital allocation, branding and the media.”

It may not be on the level of a Broadway show, but the annual meeting April 24 should be a hum dinger. Break a leg!

New York Times Management Take A Licking, But Keep On Ticking - April 26, 2007

About the best that senior executives of the New York Times Company can say about their annual general meeting is that they have survived. Their spin is it wasn’t as bad as they thought it was going to be, but anytime 42% of shareholders withhold their votes it doesn’t exactly show a big faith in a management that the shareholders are powerless to change.

The election boycott was worse than last year when 28% withheld votes. But management said afterwards they were expecting up to a 50% boycott so things didn’t go as badly as they feared.

Chairman Arthur Sulzberger said he understood shareholders were not happy with the company’s low share price. “We understand shareholder frustration as reflected in today’s vote,” Sulzberger said. “At the same time, many shareholders have expressed to us that we are pursuing the key actions needed to improve performance and returns to shareholders. The Ochs-Sulzberger family owns 89% of the company’s B shares that elects nine of the 13 board directors, and they also own 19% of the Class A shares available to the public but which only elect four board members.

Sulzberger got a big vote of confidence from Donald E. Graham, publisher at the Washington Post, who wrote in the Wall Street Journal a day before the Times meeting, “Our company has had its differences with the New York Times Company, but to support Morgan Stanley’s campaign to eliminate that company’s two-tiered stock structure is to run crazy risks with the future of its most important asset, the New York Times.”

Interestingly, the Washington Post Company and Dow Jones, publisher of the WSJ, both have similar family share schemes like the Times.