Sulzberger Withdraws The Family’s Hundreds of Million of Dollars Worth Of New York Times Stock From Morgan Stanley Custody As The Investment Firm Presses For Corporate Reforms, But Beneath The Spat Are Issues Of Great Importance

Philip M. Stone February 6, 2007

It reminds one of a kindergarten spat, but the stakes are far higher than that. Morgan Stanley Investment Management has been pressing for months that the New York Times Company’s management either shape up or ship out, but since the newspaper’s two-tier share ownership system gives the Sulzberger and Ochs families control over the board, therefore management of the company, the money fund is basically whistling in the wind. Change the two-tier system, the fund cries out, and it is told politely to go take a running jump.

Still the fund stays public in its demands, and then its parent company’s publishing analyst issues a share downgrade, not exactly good news to the controlling families who hold more than $600 million of Times shares. And those shares just happen to be held in custody accounts at Morgan Stanley. If a supposedly friendly financial company attacked your business would you want to continue letting them continue looking after your personal funds?

Investment companies employ so-called Chinese Walls that separate the often contradictory needs of various departments. One Morgan Stanley business unit probably gets a commission for looking after the Sulzberger and Ochs wealth and wants to keep them happy, but the investment side has to look after the needs of all investors so if it believes issuing a Times downgrade is necessary then so be it. And then there is the $11.5 billion fund, managed in London, that is looking after the needs of all its investors and since it holds a 7.6% stake in the Times Company and since the shares’ performance over the past couple of years has really been quite dismal it feels it should have an influential voice on how the company could be better run.

Now, one can question whether it was just coincidence that the publishing analyst issued her downgrade to the lowest “underweight” category the day after the investment fund sent the Times a proposed resolution for its next annual meeting that would not only abolish the two tier system, but also, in a not-so-subtle attack on Sulzberger personally, seek that his two positions – chairman and publisher – be separated.

Just as it is coincidence that the controlling families have apparently had enough of Morgan Stanley and are withdrawing their funds held there in custody accounts.

But scratch away the tit-for-tat and there are some fundamental points that should not be lost.

When Morgan Stanley invested in the Times Company it fully understood the two-tier share system and that it meant Sulzberger basically had full control and the non-family shareholders could shout all day for change but if Sulzberger didn’t want to make any changes then no changes would be made.

No matter how “unfair” the two-tier system may seem, it’s legal. The B shares the family owns, representing less than 1% of all outstanding shares, give it the right to elect nine of the company’s 13 board members. All told with it’s A shares the family owns only about 19% of the company, yet they have complete control. That’s the way the company was set up when it went public and that’s what Morgan Stanley bought into with its eyes wide open.

The family often makes the case that the two tier system is good for journalism – they say the families will do what is best for the New York Times as a prize journalistic entity rather than follow Wall Street profitability edicts that could well slash the editorial product.  It’s a neat cloak to hide behind.

Now that system seemed all well and good when things were going well, but Morgan Stanley, the world’s second largest securities firm by market value, could well argue that it did not foresee that in the past two years the company’s shares would drop some 40%, let alone that Standard & Poors would lower the company’s long term debt rating from A- to BBB+. It could have sold at any time but it didn’t and so now it wants to shake management up, get it to make some really hard decisions like getting rid of the Boston Globe, but in order to do that it needs to be able to exert some control where now it has basically none.

The man who played a major role in bringing Knight-Ridder to its knees could also play an important role with what happens at the Times. For none other than Private Capital Management run by Bruce Sherman is the Times’ largest shareholder outside of the family with a 18.5% stake. Yes, the very same Bruce Sherman who forced the sale of Knight-Ridder. He has had discussions with Morgan Stanley but he has not made public if he will participate in this shareholder revolt.

The Securities and Exchange Commission has told the Times Company that it does not have to present the Morgan Stanley proposed resolution to a vote at the next general annual meeting, so it won’t. Last year Morgan Stanley persuaded 28% of the A voters not to vote at the annual meeting as a protest. It didn’t mean anything in terms of getting the day’s business done but it did point out how restless the A voters were becoming. Will Morgan Stanley try the same this year and will it get more than 28% of the voters?

So what has the Times’ management been doing that has earned so much ire? It has tried to increase shareholder value by cutting costs, including editorial cuts at the New York paper and elsewhere, changing to a lighter weight paper, it has cut back on newsprint by banning stock tables and TV listings to the Internet and it will narrow the width of the New York Times, it has bought back its shares, it has sold its broadcast division, and it has invested on digital projects. The trouble is, for all of that its shares, like most newspaper companies, still kept going down.

Last week the Times announced a Q4 loss of $648 million because it wrote down the value of its two New England newspapers by $814 million. Most of that went on lowering the value of the Boston Globe, for which The Times had paid $1.4 billion in 1993.  And it’s the Globe that has most of its investors upset. There are local investors in Boston willing to buy the newspaper for some $500 - $600 million – about the value it is now written down to, yet CEO Janet Robinson announced just last week that the company has no intention of selling the newspaper. She says there are happy days ahead.

What shareholders believe is that the Times needs to bite the bullet – basically admit it paid too much back in 1993 for the Globe and that today’s newspaper environment with continuing drastically dropping circulation and revenue is not going to see a major improvement any time soon even if new department stores and malls are on the horizon, and just get rid of the property. Apart from the money losses it’s just taking up too much management time.

Take the money and buy another about.com or such that has done well this last year in revenue percentage terms – in other words put the money in digital that already provides 9% of the company’s revenues and with another big investment that figure will more quickly climb above the 12% benchmark that many newspapers are shooting at. The money will serve shareholders better in digital than it will remaining in bricks and mortar in Boston. But that’s a cold-blooded financial decision; is it one that can be contemplated from a dynastic management view?

Shareholders also question the wisdom of spending some $500 million for the past couple of years developing the company’s new headquarters on 8th Avenue which should be ready for a spring move-in. The debt on that coupled with continuing problems in print caused the Standard and Poors downgrade of corporate long-term debt. And the shareholders are not enamored with the remuneration at senior levels given the company’s performance.  Robinson, for instance, is paid a salary of $2.7 million annually while at the Washington Post, which also has a dual share system, CEO Donald Graham earns $642,770.

What would take everyone out of this misery is if the family would take the company private again, but Robinson said recently the company has no interest in doing that even though with the shares as low as they are this would be as good a time as any to try it. But why take on all that extra debt when they can run the company today as if it was all belonging to them, anyway.

While one may not necessarily agree with all of management’s decisions over the past couple of years, including its obstinacy in holding onto the Globe, one really would have to fear what might happen to America’s premier newspaper if Wall Street could really get its fingers into it to squeeze out every possible dollar of profit. Would foreign bureaus be closed down (The Globe has announced it is closing its last three), would more journalists be fired (more are going at the Globe), and would the news hole remain as large as it is (The Globe is reducing its).

Morgan Stanley and any one else who has invested in The Times can certainly expect their management to make prudent business decisions on their behalf. But they also know very well that they have invested in an American institution and the rules really are a bit different. That is should continue to make profits, by all means; but cutting away at its editorial quality to squeeze profits is something that really serves no one, and that includes Wall Street.

One has to admit that the way the Times was taken public in 1969 with the families still maintaining control was really quite a masterstroke. The reason given may have been to defend the integrity of the product, but in reality it was a neat way for the family not to give up power and yet bring in the money.

Morgan Stanley is not stupid; it understood the set-up. If it didn’t like the rules then it shouldn’t have invested there in the first place. The question now is that at this year’s annual meeting just how far is it willing to push the envelope to encourage a major shareholder revolt, and what would that earn it at the end of the day?

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