The War Zone Within the New York Times Company

The New York Times Company is reeling, as bad news for both shareholders and employees accumulates. Cash is being pulled out of production facilities and being funneled, by the hundreds of millions of dollars, into a lavish new billion dollar headquarters building, which will house a news staff that will have five percent less space at its disposal when the paper downsizes its metropolitan edition, as was announced yesterday.

The stock market certainly doesn't seem to think much of it the Times decision to shrink the paper and lay off production workers. The stock closed down 2.2% on trading of 2.5 million shares (compared to a 977,000 share daily average).  The stock is not only cents away from its low for the past year, it is also near the bottom end of its trading range for the past decade.

Thanks to a two—class system of shareholding, shares representing a small minority of the invested capital are able to elect a majority of the board of directors of the New York Times Company. Several months ago I wrote that  I would hate to be one of the 8 trustees of the voting trust that controls the New York Times.  From what I have read, the trust document saddles them with the twin duties of both preserving the Ochs—Sulzberger fortune and maintaining control of the paper.  Given the array of bad news the company has faced since then, the problem for the trustees now seems clear.  Either publisher Arthur Ochs ('Pinch') Sulzburger lacks the necessary executive talent to run the company or he has a personal agenda at odds with their duty as trustees.

The trustees have the power to fire Pinch from his executive position. Removing him from influence is another matter. His continued presence in the ownership structure adds to the challenge another family member would have in effecting a turnaround, if indeed such a willing and able family member exists. If no such relative is in the picture, Pinch's presence might seriously hamper attempts to recruit an outsider to take command.

It would take a brave soul indeed to charge into a declining family business with the knowledge that a key member of ownership, smarting at the loss of power, is likely to be a vocal critic of every move.

Furthermore, the decline in the creditworthiness of the business has increased the difficulties in silencing Pinch by buying out his interest. With all the other demands on cash, a redemption of his shares by the corporation itself may not be possible at this time. The decline in market price also makes it harder for other family members who may want to directly buy out Pinch's interest to arrange outside financing. If, that is, any family members not currently in management would wish to buy into what now appears to be a questionable investment.

Another factor for the trustees to consider is that the four family members who created the current ownership arrangement are of advanced years. While a low share price can be beneficial in estate planning, cash is always much easier to work with than shares in a declining business that are subject to transfer restrictions. Cash may also be what heirs who have little or no direct contact with the business increasingly desire, especially given all the recent bad financial news.

As I look at the array of the issues facing the trustees, a June article about the Times becoming a merger target looks increasingly astute. Media companies with a much larger market capitalization are feeling the pressure of the changing competitive environment.

I've never heard of a trustee getting in legal trouble for selling shares in a business whose fortune seems to be in decline. If an offer from a company wishing to acquire the Times were summarily rebuffed, family members might certainly hold that the trustees breached their fiduciary duty if Pinch stays in power, the business problems continue and the ability to generate cash to pay dividends is imperiled.

A merger doesn't necessarily mean selling out to a rival paper, either.  Private equity firms recently considered a bid for the Knight—Ridder media company.  Such an arrangement would probably be more acceptable to those who set up the current ownership arrangement than a merger with a "lesser" paper whose parent corporation has a larger market capitalization, such as the Washington Post.

A keen observer of the Times has even suggested to me that if the family voting trust can't get rid of Pinch, maybe Pinch can get rid of his family by leading a buyout group.  A cynic might even suggest this might have been at the back of his mind all along. Depress the market price in half from where it stood when you took over from your father in 1992, then get together with venture capitalists to buy out the family. Eliminating other family members eliminates the need to pay regular quarterly dividends and makes life simpler in other ways, especially if the resulting company is private and the deal is structured in a manner that gets the business out from any number of uncomfortable or inconvenient liabilities.

If such a deal were made before the price declines much lower, the trustees could have their cake and eat it, too: a bit of cash for everyone else in the extended family to invest as they please and a Sulzburger still presiding over the newspaper.  The people who really come up short in this scenario are the public shareholders who bought the stock when it was trading at twice the price it is fetching today.

These shareholders might well have some especially choice comments on the subject of fiduciary duty for the five trustees of the voting trust who are also among the 14 directors of the New York Times Company.

Rosslyn Smith is a lawyer, a CPA, and holder of an MBA degree.

The New York Times Company is reeling, as bad news for both shareholders and employees accumulates. Cash is being pulled out of production facilities and being funneled, by the hundreds of millions of dollars, into a lavish new billion dollar headquarters building, which will house a news staff that will have five percent less space at its disposal when the paper downsizes its metropolitan edition, as was announced yesterday.

The stock market certainly doesn't seem to think much of it the Times decision to shrink the paper and lay off production workers. The stock closed down 2.2% on trading of 2.5 million shares (compared to a 977,000 share daily average).  The stock is not only cents away from its low for the past year, it is also near the bottom end of its trading range for the past decade.

Thanks to a two—class system of shareholding, shares representing a small minority of the invested capital are able to elect a majority of the board of directors of the New York Times Company. Several months ago I wrote that  I would hate to be one of the 8 trustees of the voting trust that controls the New York Times.  From what I have read, the trust document saddles them with the twin duties of both preserving the Ochs—Sulzberger fortune and maintaining control of the paper.  Given the array of bad news the company has faced since then, the problem for the trustees now seems clear.  Either publisher Arthur Ochs ('Pinch') Sulzburger lacks the necessary executive talent to run the company or he has a personal agenda at odds with their duty as trustees.

The trustees have the power to fire Pinch from his executive position. Removing him from influence is another matter. His continued presence in the ownership structure adds to the challenge another family member would have in effecting a turnaround, if indeed such a willing and able family member exists. If no such relative is in the picture, Pinch's presence might seriously hamper attempts to recruit an outsider to take command.

It would take a brave soul indeed to charge into a declining family business with the knowledge that a key member of ownership, smarting at the loss of power, is likely to be a vocal critic of every move.

Furthermore, the decline in the creditworthiness of the business has increased the difficulties in silencing Pinch by buying out his interest. With all the other demands on cash, a redemption of his shares by the corporation itself may not be possible at this time. The decline in market price also makes it harder for other family members who may want to directly buy out Pinch's interest to arrange outside financing. If, that is, any family members not currently in management would wish to buy into what now appears to be a questionable investment.

Another factor for the trustees to consider is that the four family members who created the current ownership arrangement are of advanced years. While a low share price can be beneficial in estate planning, cash is always much easier to work with than shares in a declining business that are subject to transfer restrictions. Cash may also be what heirs who have little or no direct contact with the business increasingly desire, especially given all the recent bad financial news.

As I look at the array of the issues facing the trustees, a June article about the Times becoming a merger target looks increasingly astute. Media companies with a much larger market capitalization are feeling the pressure of the changing competitive environment.

I've never heard of a trustee getting in legal trouble for selling shares in a business whose fortune seems to be in decline. If an offer from a company wishing to acquire the Times were summarily rebuffed, family members might certainly hold that the trustees breached their fiduciary duty if Pinch stays in power, the business problems continue and the ability to generate cash to pay dividends is imperiled.

A merger doesn't necessarily mean selling out to a rival paper, either.  Private equity firms recently considered a bid for the Knight—Ridder media company.  Such an arrangement would probably be more acceptable to those who set up the current ownership arrangement than a merger with a "lesser" paper whose parent corporation has a larger market capitalization, such as the Washington Post.

A keen observer of the Times has even suggested to me that if the family voting trust can't get rid of Pinch, maybe Pinch can get rid of his family by leading a buyout group.  A cynic might even suggest this might have been at the back of his mind all along. Depress the market price in half from where it stood when you took over from your father in 1992, then get together with venture capitalists to buy out the family. Eliminating other family members eliminates the need to pay regular quarterly dividends and makes life simpler in other ways, especially if the resulting company is private and the deal is structured in a manner that gets the business out from any number of uncomfortable or inconvenient liabilities.

If such a deal were made before the price declines much lower, the trustees could have their cake and eat it, too: a bit of cash for everyone else in the extended family to invest as they please and a Sulzburger still presiding over the newspaper.  The people who really come up short in this scenario are the public shareholders who bought the stock when it was trading at twice the price it is fetching today.

These shareholders might well have some especially choice comments on the subject of fiduciary duty for the five trustees of the voting trust who are also among the 14 directors of the New York Times Company.

Rosslyn Smith is a lawyer, a CPA, and holder of an MBA degree.