Money Talks, Bullsh*t Walks, page 10
When given the news, Zell was incensed and ready to walk away from the bargaining table. He felt he was being played, and yet he still wanted Tribune. To a true corporate turnaround artist, it represented the ultimate test. It was no longer only about the money; it was about the prize itself and what it would mean if he could turn Tribune’s fortunes around. His quick analysis of the numbers on a higher bid showed a razor-thin margin of error. He gave himself the green light to proceed.
Reluctantly, late on Sunday, Zell raised his equity commitment from $225 million to $315 million, or the equivalent of $34 a share, equaling the Burkle-Broad bid. In a late-night session at Tribune Tower, the board met at 10:30 P.M. and approved Zell’s bid in less than thirty minutes. Pate immediately relayed the good news to Zell via phone. In Los Angeles, it was still only 9:00 P.M., but Zell opted for a quiet celebration with his wife. He had won the prize, but now came the hard part—could he find enough polish to make the trophy shine?
ESOP’S FABLES
Monday, April 2, 2007, dawned cool and crisp over both Chicago and Los Angeles. For Burkle and Broad, the deal was over. If they wanted a piece of Tribune, they would have to deal with Zell. For Zell, the work to close the deal was just getting started. It would take another eight months to complete the complex transaction in December, over a year after Tribune was originally put on the auction block.
The structure of Zell’s winning bid was so complicated that it required a three-page press release from Tribune just to explain it all. There was no question, however, that it was a sweet deal for Zell. After all, he had only $315 million of his own skin in the game versus $8.2 billion in new debt. That translates to an equity stake of less than 4 percent. Once again, the grave dancer had danced his jig over an ailing industry. But this time, as he would soon discover, he had to contend with a uniquely pessimistic group of employees, which would make a turnaround of the troubled media company all the more complicated.
First, it would take many months just to explain the ESOP structure to Tribuners. According to Corey Rosen, executive director of the National Center for Employee Ownership, companies controlled through an ESOP structure generally perform better than non-ESOP firms. And though Rosen found nothing “subversive” in Tribune’s ESOP, it did seem a poor fit for the economic times. “The vast majority of ESOPs are set up in companies that are successful at the time they are set up and become even more so down the road. This is unusual in that respect, that you had a company that was in more difficulty at the time it was set up,” explained Rosen.4
One misperception was that if employees essentially “owned” the company, then they would be in control. Not so. No matter how you sliced it, Zell was both pilot and crew. “When we researched the companies where employees did have more control rights, we didn’t find that the decisions that they made at the corporate level were significantly different,” said Rosen. “So there’s this perception that if the employees are on the board that they would run things differently. Well, the economic circumstances probably are more important in dictating what kinds of decisions get made. Changes at that level are not the cure-all that some people think they are. In this case it would probably be symbolically important. It’s doubtful it would change anything in terms of how the company was run. But it might create greater transparency and a sense that people at that level are willing to listen to employee concerns.”
On structural grounds, at least, Rosen essentially affirmed Zell’s control over the ESOP, stating, “Contrary to what most of the stories say, the employees didn’t invest their own money in this transaction. They got a stake in the company and their benefit plans would end up being in theory slightly to much better if this thing worked out even reasonably well. Should they get something when they haven’t put any equity in directly, which Zell did, in terms of governance rights? That’s a tough question. Most ESOPs don’t.”
But Rosen saw tremendous upside in changing the company’s former management style so that employees have greater influence on decisions about how their jobs are done. “That’s what really makes ESOPs more or less effective, and it’s a lot harder to do that than to stick an employee or two on the board of directors and call it good. That really is the challenge that the Tribune or any ESOP company faces. As far as I know, the Tribune hasn’t taken the steps to do that kind of comprehensive day-to-day involvement, and I think had they done that, they would be better off. Our research shows that makes the difference.”
TRYING TIMES
It took more than eight months to close the Tribune deal, but why? Some pundits speculated that Zell got cold feet and tried to back out in the summer after Tribune’s financial health slid closer and closer to the intensive-care ward. Revenue from classified and real estate advertising was dropping like a rock in early 2007 and showed little sign of ending its downward spiral as the months passed. Tribune revenues continued to nose-dive through the summer and into the fall of 2007. There seemed no end to the sour results.
Plus, there was the little matter of the bankers. They were getting nervous. Four of America’s largest financial institutions—JPMorgan Chase & Co., Merrill Lynch, Citigroup, and Bank of America Corp.—backed Zell’s Tribune deal but were beginning to fear that the huge debt load would ultimately doom the company. Collectively, during the delay in closing, the banks would see some $500 million in losses on the loans and high-yield bonds needed to fund the transaction. But once again, Zell’s reputation won the day. “We believe in this transaction because we believe in Sam Zell,” said James B. Lee Jr., JPMorgan’s vice chairman.5
Another stumbling block to the sale involved Zell’s all-time favorite partner of choice, the U.S. government. Tribune asked the Federal Communications Commission to waive its cross-ownership rule forbidding any company from owning both a television station and a daily newspaper in the same major market. Tribune had been granted temporary waivers for cross-ownership in New York, Los Angeles, Hartford, and South Florida. In Chicago, where Tribune owned both WGN-TV and the Chicago Tribune, the FCC had issued a permanent waiver of the rules.
By mid-October, Zell and his team were getting antsy. They needed approval soon to close the Tribune deal before year’s end. That approval came on November 30 in a sharply divided FCC vote.
The day of the closing, as agreed, Tribune CEO Denis FitzSimons announced his resignation, effective January 1, 2008. According to SEC filings, he also walked away with a tidy $38 million golden parachute in combined severance and stock after twenty-five years with the company.
Inevitably, questions immediately arose about Zell’s focus and engagement with his new media empire. After all, he had a number of enterprises to run. “I think that’s the 4,812th time in the last twenty years that someone has posed that exact question to me,” Zell responded when questioned. “Each time I look at them and say, I don’t know the answer to your question other than history says that Sam pays enough attention to everything Sam does, and Sam surrounds himself with a lot of very high-quality people with a lot of authority, and I don’t think you’ll find very many examples of any businesses Sam has touched that can claim that we ignored them or claim they didn’t get enough of Sam’s time. I think the same will be true here.”
Zell installed himself as CEO but promised not to retain the mantle forever, saying he preferred to be an owner who could make decisions and cut through the notorious Tribune red tape. “I think the definition of CEO as you have historically known it has changed since yesterday (deal closing). Maybe I’m asking the $64,000 question, if the company even needs a CEO. We’re going to find out. The answer is, I’m sure not going to be a conventional CEO. At the same time, I am one hundred percent accessible, and I’m going to do whatever it takes to achieve the objectives. Do I have enough time? Yep. Do I have enough ambition? Yep. Do I have enough determination? Yep. So you don’t have to worry about that one.6
Zell would quickly find that the layers of dissent among Tribune’s employees ran deeper than he anticipated, and the complexity of the situation would drain every last ounce of his management skills.
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PAPER TIGER
AS THE LEADER of the third-largest media organization in the United States, Zell was uniquely in charge of either (a) building upon the very foundation on which the business of news would be built or (b) decapitating the beast and starting from scratch. Zell is a self-described “dispassionate” investor, one who admittedly understands history but is focused on the future and, in particular, future cash flows. He is rabidly deal driven, hates to lose at anything, and is expert at extracting the maximum value out of any given situation—as measured by bottom-line profits.
“The bottom line is that what happened in the past stays in the past,” he said. “My head only looks forward, it doesn’t turn backward. There is a lot of shit in the history of the L.A. Times, and I’m really sorry that I can’t do anything about it. All I can do is address the future.”1
Given some of his initial incendiary comments, journalists were rightly concerned to know exactly where their new change-agent leader might be taking them and their way of life. Most had never heard of him, but they did get a sense that this billionaire deal maker would be personally involved in their business. They burned through countless gigabytes of Internet bandwidth doing Google searches on Zell. What they found was a mixed bag.
Aside from the obvious deals he had won and lost, there was little to gauge his personal style. When it came to putting his money where his mouth was with philanthropic endeavors, for example, by the standards of modern-day billionaires, it turns out that Zell was only a modest giver. An avowed Zionist committed to the state of Israel, Zell does open his wallet freely to a variety of Jewish causes. He launched the Zell Entrepreneurship Program at the Interdisciplinary Center in Herzliya, Israel, north of Tel Aviv, in 2002. The program gives outstanding undergraduate students an inside look at advanced entrepreneurial studies in the creation of real-world business ventures.
Closer to home, Spertus College in Chicago created the Bernard and Rochelle Zell Holocaust Memorial, the first permanent Holocaust exhibition to be built in North America since 1975. It has become an important resource for local teachers and students, and the centerpiece of the Bernard and Rochelle Zell Center for Holocaust Studies. A Jewish day school in suburban Chicago, funded by Zell, also bears his father’s name.
After his Tribune takeover, Jewish media couldn’t get enough of him. Zell was described by the American Jewish Daily Forward newspaper as a Billionaire Boychik, boychik being Yiddish for “young man.” This was a not-so-subtle reference to his buying one of the largest companies in an industry long known for its Anglo-Saxon heritage.
On occasion, both the Chicago Tribune and the L.A. Times had angered local Jewish community leaders with what they felt were negative stereotypes and anti-Israeli stances.
“The [Chicago Tribune] has a reputation for having a thick glass ceiling for Jews,” said Michael Siegel, who for twenty-five years has been the rabbi at Chicago’s Anshe Emet Synagogue, where Zell is a member. “For someone like Sam Zell, who is noted as a grave dancer, here he is more of a grave spinner. There are probably some past owners and executives who are spinning in their graves right now.”2
But despite the causes and the kudos, many industry analysts and journalists feared that Zell was taking on an industry and establishment he could never fully understand or appreciate. More damaging was the very real possibility that his F-bomb style would never mesh with the hard-fought values of more than a century of journalism history. “Newspapers have historically been monopolies insulated from reality. I’m going to deliver a dose of reality,” Zell boasted.3
Not unexpectedly, the message went down more like a poison pill. “When he was making the purchase, the media industry’s response was ‘What arrogance that he thinks he can come in and figure this out even though we couldn’t,’ ” said Lauren Rich Fine, a thirty-year veteran media-industry analyst formerly with Merrill Lynch and then research director at ContentNext in Cleveland. “That’s the response I kept hearing, that he doesn’t know anything about media, so why does he think he can do it?”4
Fine, however, viewed Zell as more a breath of fresh air in an industry that had grown decidedly stagnant. “There are a lot of colorful personalities, but few and far between in the last ten to twenty years. Then you bring in someone like Zell, who has more personality than three people combined. It’s not necessarily his crudeness or anything else, it’s his willingness to just tell it like he sees it. I had been a very big proponent that when a model is broken, the best thing that can happen is to bring in an outsider who isn’t shackled by the way things were but is a smart business person who can look at all the assets they have and see what they can make out of it. There was a fear because he’s known as a cost cutter and a no-BS sort of guy and the industry has really tried hard to preserve the status quo. Insiders really don’t want the business to change,” said Fine.5
JOURNALISM’S DEEP ROOTS
When Walter Williams founded the nation’s first journalism school in 1908 on the campus of the University of Missouri in Columbia, about halfway between St. Louis and Kansas City and only thirty miles north of the state capitol in Jefferson City, his basic premise was to create a centerpiece that would teach the profession of journalism.
Strolling across the verdant lawn of the Francis Quadrangle, the three-acre heart of the university’s campus, six ghost-white marble columns are all that’s left of the first academic hall after a fire destroyed the rest of the structure in 1892. These eerie guardians have become the university’s enduring nod to both the past and the future.
All of the buildings situated around the Quadrangle are old-style redbrick structures, modeled after Thomas Jefferson’s capitol and dome at the University of Virginia. Here also sits Jefferson’s tombstone, donated by his heirs as a tribute to the university’s pioneer status as the first built within Jefferson’s Louisiana Purchase.
The newest resident of this historic district is strikingly similar—redbrick facade and all—tucked away in a cranny to the side of the quad. But behind the retro exterior sits a sleek and modern $30 million symbol of journalism’s past, present, and future. The dedication of the new 47,000-square-foot Reynolds Journalism Institute in September 2008 paid homage to journalism school founder Walter Williams and came at a time when one of the nation’s oldest institutions, the American newspaper, sits at a critical crossroads, perhaps even on the precipice of extinction.
Walking through the large wooden doors, visitors are met with sweeping vistas of airy glass and steel. Some might argue that this structure mirrors the state of today’s newspaper industry—the wrapper may look the same, but what’s inside needs to be different, even modern, and most of all, relevant.
During the three-day celebration of the journalism school’s centenary and the inception of the institute, journalists from across the globe descended on Columbia to share their views on the state of the profession. One of the hottest topics of conversation was the future of newspapers and Zell’s role in it.
THE “ELITE” MEDIA
Journalism as a profession is one of the hardest to quantify, and many critics complain of its lack of accountability. But for the past hundred years, writers and editors have followed one steadfast rule—it is their civic duty to get the story, inform the public, and be the people’s eyes and ears.
Many of today’s journalism schools crank out graduates who have practical, hands-on training in real-world media. As Walter Williams put it, “The best way to learn about journalism and advertising is to practice them.”
Williams is perhaps best known in the profession for creating “The Journalist’s Creed,” a statement of journalism and advertising professionalism cherished as the most important pronouncement of its kind. Adorning the walls of the National Press Club in Washington, D.C., at its heart is a simple statement:I believe that advertising, news and editorial columns should alike serve the best interests of readers; that a single standard of helpful truth and cleanness should prevail for all; that the supreme test of good journalism is the measure of its public service.
How much of Williams’s ideals survive today is a contentious topic, in media circles anyway. Certainly performing the “public service” role is increasingly challenging, given the precarious economic condition of America’s newspaper industry.
“Zell represents the most recent if not the strongest example of a businessman who sees newspapers as a business. Period,” said Dean Mills, dean of the University of Missouri School of Journalism. “I don’t see Zell or any of these people as big villains. They are just businessmen and they are approaching it as a business, which probably is inevitable at some point.”6
As a former journalism practitioner as well as professor, Mills quickly cuts to the chase when it comes to the foibles and future of modern newspapers. “There was a golden age of metro newspapers, probably from the 1960s to the 1970s, when newspapers were making money hand over fist and so were able to indulge their journalistic fantasies of great journalism. I think that age is over because one of the main changes that new technologies have brought about is a slivering of the audiences.”
Mills continued, “There is this myth about the golden age being a time when all the citizens got the newspaper on their doorstep and learned what was going on at city hall and read it voraciously. In fact we have readership studies going back to the 1930s and 1940s, which show quite clearly that most people did not read what was going on at city hall or the state capitol or whatever. Most people bought the newspapers because they wanted one or two parts of it, like the sports page or the crossword puzzle or whatever. It was this great omnibus product, so what was really happening all that time was the crossword nuts and sports nuts and the comics fans were subsidizing those of us who had this public affairs fetish and subsidizing reporters giving them the time to do the big projects.”
