The New York Times And The Forces Of Creative Destruction
As prospective buyers circle, and as the brutal commentary of financial analysts intensifies, the end of the Sulzberger-Ochs family's 113 year control of the New York Times -- through forced sale or bankruptcy -- has become an acknowledged possibility, with some well-informed observers suggesting that insolvency may be roughly a year or two away.
If officials of the paper are forced to declare bankruptcy, it will be difficult -- perhaps impossible -- for the Sulzberger-Ochs family, which has been at the helm since 1896, to prevent the paper from falling into the hands of an individual or a corporation (for example, Rupert Murdoch and the News Corporation) whose journalistic principles are markedly different from, if not antithetical to, those that have guided the United States' dominant newspaper.
The New York Times Company, which owns the New York Times, the Boston Globe, the International Herald Tribune and 15 other daily newspapers, lost $74.5 million in the first quarter of 2009, compared to a loss of $335,000 in the first three months of 2008.
A takeover of the New York Times by an outsider would be a cataclysmic event in American journalism. Under control of the two families who have intermarried -- the Ochs and the Sulzbergers -- the Times is recognized nationally and internationally as the American paper of record, setting a standard, in the scope and the depth of its coverage, that no competitor has ever been able to match over a sustained period of time.
"The peculiar literary inheritance might make this a tricky case, as the value of the asset depends on the composition of its board," University of Chicago Law School professor Richard Epstein told the Huffington Post. In the event the company sought bankruptcy protection, the "family would surely lose control, and most of the nonvoting shareholders would be out as well."
In the case of a sale in bankruptcy, "the high bidder usually wins, and the question is whether that bidder will be able to keep the NYT's reputation. Generally, the party who can do most with the brand will bid the highest, so there is some protection. How strong? [Not very.] Think Chicago Tribune," Epstein suggested, referring to Sam Zell, the highest bidder for the Chicago Tribune and such other papers as the Los Angeles Times and Baltimore Sun, all of which have sharply deteriorated under Zell's management.
Specialists in bankruptcy law -- including Stanford's Marcus Cole, Columbia's Ed Morrison, Yale's Jonathan Macey, University of Pennsylvania's David Skeel, Berkeley's Jesse Fried, University of Michigan's John Pottow, and Yale's Eric G. Brunstad Jr. -- were exceptionally forthcoming with detailed responses to HuffPost inquiries, and all were in agreement with the view that the Sulzbergan-Ochs family could face serious difficulties holding onto the Times if the paper's finances continue to nosedive.
"These are very complicated questions, but, very generally speaking (with lots of qualifications): (1) if the NYT filed for protection under Chapter 11 of the bankruptcy code, the company would try to reorganize business and balance sheet; there would be an 'exclusivity period' under which the incumbent board and management could run the company and propose a plan of reorganization to the creditors for their approval," said Macey. "It is highly unlikely (unless there are special facts such as if the Sulzberger-Ochs family were dominant creditors as well as shareholders ) that they could retain control; (2) if instead of bankruptcy the company were simply 'put up for sale' it would have to be auctioned off to the highest bidder."
Fried pointed out that outside of bankruptcy, the Sulzberger-Ochs family could sell its own special stock, which effectively controls the company, to whomever they choose. In the event that the paper continues its downhill slide toward insolvency, such a sale would appear to be one of the few options available to the Sulzberger-Ochs family if its goal is to find an owner who will maintain the paper's values and traditions.
But, Fried added, "if the family sells the assets of the NYT, and distributes the value pro rata to all shareholders, both voting and nonvoting, they will generally have a fiduciary duty to sell to the highest bidder. If they were sell the assets at a low price to a related party, they would be sued and probably be forced to pay damages to the injured non-voting shareholders."
Similarly, if the assets were put up for sale while in bankruptcy proceedings, "the family would have difficulty disregarding the highest bidder" in favor of a bidder considered a stronger proponent of the journalistic values maintained by the family.
While views of the viability of the Times under current management vary in the community of financial analysts, some are strikingly pessimistic.
Barclays' analyst Craig Huber wrote after the NYT reported is first quarter losses: "We could argue the stock to zero given the high debt load," adding, "net debt to (operating profit) is way too high." In his analysis of the finances of the NYT, Huber contended, "In our opinion, newspapers cannot cost cut themselves to prosperity and an online-only newspaper model is not profitable, not even close."
Henry Blodget, in turn, said that if the company "can avoid burning more than $100 million of cash in the next two years, the day of reckoning will be postponed until 2011, when some of the big debts start coming due (starting with a $400 million line of credit, which, by then, will be maxed out)."
Blodget is particularly critical of the $250 million loan, and the 14-percent interest rate, the Times received from Mexican billionaire Carlos Slim. After examining all the fees and terms of the loan in Times filings with the SEC, Blodget wrote that when the loan was announced in January, "we knew then that the deal was dizzyingly expensive--the corporate equivalent of borrowing money from a payday loan shop. What we didn't know was just how expensive it was--and how many puppet strings the clever Carlos attached....this money was just about as expensive as it gets."
Morningstar's Tom Corbett did not make dire predictions, but he could by no means be described as sanguine:
"The swift and relentless decline in ad spending was more than evident in New York Times' grim first-quarter results reported April 21... Total first-quarter revenue of $609 million represents a 19% decline from the same period a year earlier. It also marks a breathtaking acceleration in the rate at which the Times' top line is hemorrhaging, both sequentially and year over year, as its once-copious flow of ad dollars continues to slow to a trickle... With little to no visibility regarding a sustained recovery in ad spending, we expect margins to continue to come under pressure, as declining revenues continue to push up against the publisher's highly fixed cost structure."
The Times is not willing to discuss the possibility of bankruptcy, or the details of the Sulzberger-Ochs family's ability or inability to control the selection of a buyer, should they decide to sell. "We are not going to speculate on that," said Catherine J. Mathis, senior vice president of corporate communications, in response to a HuffPost query. "As we've said, any change to the capital structure of the Company, including a sale of the Company, would require the approval of the family trustees."
At the NYT annual meeting last month, Arthur Sulzberger, Jr., chairman, The New York Times Company and publisher of the New York Times, told shareholders:
We know that there are considerable challenges before us, but past experience teaches us that the outcome will be determined by our ability to adhere to the formula that has successfully driven this Company for so long. That formula can be summed up in this thought: quality journalism attracts a quality audience which, in turn, attracts quality advertisers. It is this idea, expressed various ways over numerous decades, which has seen The New York Times Company through previous grim economic periods and has enabled The Times to emerge as the world's most powerful journalistic voice. Our quality journalism is the fundamental asset our shareholders have...
One of the reasons the Company has been able to weather past financial and political storms has been the steadfast support of the Ochs-Sulzberger family. On behalf of Michael Golden and myself, let me assure you that our family continues to be enormously proud of the legacy of The Times, its accomplishments, the loyalty of its readers and the role it plays to ensure a healthy democracy and a robust exchange of ideas throughout the world. And we are here to stay, continuing to build on the legacy begun in 1896 by Adolph Ochs.
Asked about the future of the company, Sulzberger declared, "This company is not for sale... The Ochs-Sulzberger family will be with the company every step of the way."
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First Posted: 05-15-09 09:18 AM | Updated: 05-15-09 01:21 PM