“Bittersweet, Great Experience, But Time To Move On” – Another New York Times Institutional Investor Admits You Just Can’t Win Against The Two-Class Share System

Philip M. Stone February 25, 2010 Follow on Twitter

Scott Galloway achieved more than his institutional investment rivals – he at least got a seat on the New York Times Company board – but now he is giving up the ghost of trying to change things at the Gray Lady and he is stepping aside. And, oh yes, while he was there his financial stake in the company took a dive, too.

The bottom line is that no matter how much Wall Street hates the two-class share system it has yet to find a way of beating it. The New York Times Company continues to tell Wall Street it is welcome to invest, but not to manage the company.

For a while there back in 2008 it seemed there was a crack in the NYT armor. It agreed to add two directors that it didn’t want to its board because the private equity funds they represented had bought some 19% of the A shares – the family owns around 88% of the B shares that actually controls the company.

So Harbinger Capital Partners and Firebrand Partners proposed that James Kohlberg and Firebrand founder Scott Galloway become two new voices on a board expanded to 15 of which the Ochs/Sulzberger family held nine seats. Their purpose, they said at the time, was to help the company develop “the optimal capital structure and a path for transforming The New York Times from a low growth company to a robust firm that is both the newspaper of record and the most trusted starting point on the Internet.”

The newcomers said at the time they did not dispute the dual share system that gave  control to the families (they really would have loved to have dumped it, but there was no way they could), but they said they also wanted to see the company become far more active in digital businesses and get out of poorly producing investments. Two examples of what to do were selling the company’s 17.5% share of the Boston Red Sox baseball team and also to sell their new Manhattan headquarters building and then lease it back.

Well, the company did put up its Red Sox stake for sale but as of yet no buyers at the price the company is willing to accept, and it did indeed sell its headquarters and lease it back. It has announced that next year it will be putting up a pay wall of sorts on its Web site, it has cut back on costs by reducing staff, and, oh, yes, it agreed to pay 14% interest on a $250 million loan from Mexican billionaire Carlos Slim.

But apart from that Web charging, there was no Web expansion along the lines the hedge funds had suggested. They had wanted the company to own second-to-none Web sites in such areas as travel, fashion, and classified advertising and they didn’t particularly care if that were done via organic growth or by buying up properties. They didn’t think much of print opportunities, although they understood the print newspaper was a no-go area, but since newspaper web sites take in more than one-third of all Web traffic then that was where they figured the NYT could expand its visibility and profits. But that never really happened.

And the white flag is now hoisted. Galloway has announced that he will not stand for re-election to the board at its April general meeting although James Kohlberg remains. Galloway’s Twitter said all that really needed to be said, “Bittersweet, great experience. But time to move on.” The two hedge funds have been reducing their stake ever since the company hit a historic $3.49 low last February – it has since bounced back to $10.75 – but their original $500 million investment is probably down to about half that today.

Harbinger and Firebrand tried to do what Morgan Stanley Investment Trust had tried but failed to accomplish beforehand – have some sort of say in how the New York Times Company is managed. It, too, finally gave up that ghost and sold out its 7.2% stake. 

At the time of the Harbinger/Firebrand investments, then Goldman Sachs media analyst Peter Appert  said in a note, “We do not see an easy or quick fix to what ails the company (and industry), other than continued investment to drive a migration of revenues and earnings to Internet-based operations.” But in an obvious reference to previous funds hitting their heads on the Sulzberger wall, he added, “It’s not clear to us what Harbinger and Firebrand bring to the table to address this challenge.”  That has now been answered -- nothing.

In the past couple of years the NYT Company has been concentrating on keeping its financial head above water which is why the company a year ago agreed to pay 14% interest on the $250 million Carlos Slim loan. But now tongues are wagging that maybe Slim bought something more – editorial silence on negative Slim stories which other media outlets are covering studiously.

There’s currently a big complicated court battle involving US banker J.P. Morgan, and the two largest Mexican telecom companies, one of which is owned by Slim. The comments and testimony so far put the bank and Slim’s company in a particularly dim light. Yet while the likes of Reuters, The Wall Street Journal, and The Christian Science Monitor and others have given prominent coverage to the case there has been nothing in the NYT print newspaper or its web site. Bloggers are rightly asking, “How come”?

Well, it’s not 100% so. While it’s true there’s no staff or agency reporting of the court case in the news pages -- and it is a legitimate question why not -- the issue does gets prominent coverage on the NYT’s Carlos Slim Archive page. Do an NYT archive search on Slim and it takes you to his page in “Times Topics”. Look at the middle column titled, “Headlines Around the World” and here are the top four linked headlines as of Wednesday, probably automatically generated via word search, all from non-NYT sources: “The Biz Story the NYT Ignored”, “Is The NYT Ignoring a JP Morgan Bombshell Because It Makes Investor Carlos Slim Look Bad?”, “The Story the New York Times Won’t Touch”, and “Mexico: Cellphone clash of Titans”.

A perfect example showing when one goes for automation instead of editors that you may get exactly what you don’t want.