War at the Wall Street Journal

by Sarah Ellison

  After Zannino and his family returned to the United States, the new CEO actually felt somewhat refreshed—a lucky respite given that his life wasn't about to get easier. The world of newspapers was collapsing as if felled by some zealous natural disaster. A brief review of the communications industry revealed fear, havoc, and stockholders who seemed to be taking on the personalities of bloodthirsty warriors. Since Zannino had taken the reins at Dow, he had watched the McClatchy Company, owner of the Sacramento Bee, buy Knight Ridder Incorporated, the nation's second-largest newspaper chain and a storied name in the business. McClatchy had then turned around and sold off Knight Ridder's weaker papers, showing that even a newspaper empire that had turned itself inside out to please its investors was not immune to being attacked by one. (Knight Ridder CEO Tony Ridder, who resolutely cut his papers' staffs for the sake of his shareholders, had tried to assuage the aggressive newspaper investor Bruce Sherman's complaints, before being forced by Sherman to sell himself.) Elsewhere, the Tribune Company, which owned the Los Angeles Times, the Chicago Tribune, Newsday, and the Baltimore Sun, among other once great titles, was battling with its own ruling family, the Chandlers, while desperately seeking a way to goose the stock price. Then there was the virtually unknown Morgan Stanley money manager in London, Hassan Elmasry, who was challenging the New York Times Company. Elmasry had, politely but persistently, attempted to engage Arthur Sulzberger Jr. in a letter exchange about the latter man's business decisions. The scion brushed off Elmasry's entreaties, delayed meeting with him personally, and as a result stoked his anger and invited a proxy war. Sulzberger was, by tradition, both chairman of the Times company and publisher of its flagship paper. The dogged investor wanted someone else to hold at least one of the positions; he thought the heir to the Sulzberger family wasn't up to the task. Elmasry received substantial support from the Times company's common shareholders, but it didn't matter. The Sulzbergers, the same as and yet very different from the Bancrofts, controlled the votes. The episode was an embarrassment from a shareholder rights perspective, Zannino thought, and he wasn't going to allow anything like that to happen on his watch at Dow Jones.

  He knew that sooner or later his company was going to find itself "in play," Wall Street's term for being up for sale. Obviously, he had to start playing the game—planning and strategizing. So he talked it over with his board of directors and talked to several investment banks, including Goldman Sachs, the best there was at financial parrying, so he could be prepared.

  As Zannino made his way to News Corp.'s headquarters in midtown Manhattan a few minutes before seven thirty on a Thursday morning in late March, his cell phone made its usual annoying noise.

  "Hey, how you doing, buddy?" Jimmy Lee said, a little too cheerily given the hour and Zannino's slightly anxious mood. The two friendly conspirators hadn't spoken in months, but they slipped easily into idle banter. Jimmy knew this was the moment in the scenario where their interests might diverge. Whatever happened, each knew that they would, almost certainly, have to unite again. So they entertained each other. Zannino couldn't be absolutely positive that Jimmy Lee knew his destination that morning. Murdoch wasn't gabby or a man too likely to trust even his allies. So Zannino made no mention of his business.

  As his car pulled up in front of News Corporation, Zannino, who was not going to be late for his appointment with Murdoch, started his rather abrupt attempt to extricate himself from the call. "OK, I gotta hop," he said.

  Without missing a beat, Jimmy replied, "Have a good breakfast."

  Of course Zannino realized the significance of Jimmy's comment, which revealed, in fact, that Jimmy knew it all, all along. Murdoch wasn't quite the lone wolf he had envisioned. He had to have talked to Jimmy about the meeting. After all, Jimmy was Murdoch's Zannino expert. He would have been consulted.

  Upstairs in one of Murdoch's executive dining rooms, Zannino sat down for what would probably go down as one of his life's least leisurely repasts. His sixth sense told him something, and to an observer he might have called to mind an eager young athlete from the second string waiting to be ordered off the bench. But Zannino wasn't entirely certain that Murdoch was about to put him in the game. He had told his general counsel, Joseph Stern, about his breakfast, but no one else. The meeting with Murdoch, he reasoned, willfully ignoring the obvious, was just like any other CEO chitchat. He knew it could appear the way it obviously appeared—as if he was flirting with a verboten suitor—but he wasn't going to let that kind of thinking deter him. He was a media CEO, and it was perfectly reasonable for him to sit down with any other media CEO for breakfast, he thought, in preemptive defense against his critics who thought Murdoch a dangerous presence, best kept far away from Dow Jones. Plus, Zannino wouldn't mind getting Murdoch's advice on the business. He sensed what might be coming. A guy like Rupert wasn't about to waste time on a seduction act if he wasn't going to make a move.

  Seemingly at ease, Murdoch steered the conversation from vacation spots to—again—American Idol to the tribulations of the newspaper business and the likely outcome for the Tribune Company, which would be sold days later to Chicago real estate mogul Sam Zell, a deal Jimmy had helped arrange and finance. Zannino was impressed by Murdoch, and at one point in the conversation he acknowledged the mogul's experience in the industry with a deference that, given the rapidly changing circumstances and Murdoch's purpose, would seem like the most perfect of invitations: "What would you do with Dow Jones?" Zannino asked. Murdoch didn't answer the question directly. Conversations in the big leagues were, surprisingly, punctuated with fumbling throat clearing and semi-awkward silences. One such moment of quiet followed Zannino's question, but Murdoch didn't dive in immediately. The minutes crawled by and the wait seemed increasingly endless. Finally, as the plates were about to be cleared, the action kicked in. Maybe Murdoch followed some sort of old-fashioned dictate that forbade actual business discussion until after the food had been eaten.

  "I'm thinking about making an offer for the company," Murdoch said. "I think it's the right time."

  "Rupert, you know as well as I do that it's not my call, that it's the family's call," Zannino said. "Just at our last board meeting it came up and they said they didn't want to sell."

  The response was part reflexive and part ploy; first approaches are always met with lack of interest or lists of difficulties impossible to overcome. But the sentiments to which Zannino referred were not merely fabricated to serve the needs of the negotiating table. He offered an informed reply. Whatever modifications had occurred among the Bancrofts, whatever shifts had been seen in their attitudes toward reducing their Dow stock holdings, a sale of the company by the increasingly divided family was still very hard to envision. At the company's February board meeting, the topic of selling the company had, indeed, come up.

  That February meeting was one of the first in the newly renovated conference room Zannino had ordered up as soon as he won the top job. Down the hall from the smaller, wood-paneled arena where Kann and his predecessors had presided, Zannino wanted something lighter, airier, more contemporary. The new spot had glass doors and updated leather chairs. It was all a part of the overhaul of the executive quarters he had ordered when he took the job. These details, it turned out, were the easiest things for Zannino to change. The rest of the company was proving more stubborn. The meeting was well attended. Almost all of the sixteen directors were present, including Kann, Hockaday, Steere, McPherson, all three Bancroft directors, and Mike Elefante.

  Zannino, CEO for about a year at this point, presented the board with his plans for the company. It was a typical three-year strategic plan, set out in bullet points and slides and full of numbers and profit estimates, far more detailed than the type of dutiful yet meandering picture Kann would have shown the directors. Zannino wanted his regime to be entirely different. One of the side topics of conversation was the decision to start selling advertisements on the front page of the Journal. The rest of the conversation was typical for him: he
was, as he had shown with championing acquisitions such as MarketWatch.com and Factiva.com, going to move Dow Jones away from its newspaper roots and into the digital world. At the end of the three-year plan in 2009, the company would generate more than 50 percent of its revenue from digital businesses, he told the directors. The company still generated well over half its revenues from print newspapers. Some in the Journal newsroom joked that he could get there simply by waiting for his flagship paper to shrink. The plan was, importantly, measured in the end by how Wall Street would reward that performance, and he told them that in three years, the company's shares would be worth $47 apiece, a respectable boost from where they were currently stalled. At the close of the presentation, the directors started giving their feedback. Someone said that everyone seemed happy with the plans.

  "Well," said Hockaday, haltingly, "not everybody might be happy."

  And then Hockaday opened up a conversation about the company's future and whether the Bancrofts would ever want to sell Dow Jones. It was a topic that despite its implications for Dow Jones's existence was almost never discussed, certainly not in this room, wood-paneled or not. Zannino had not disclosed his meetings with Murdoch to the Bancrofts or the board, although he had informed Dow's general counsel so as to avoid any accusations of subterfuge. The three Bancroft family members in the room—Leslie Hill, Lisa Steele, and Chris Bancroft—were surprised at the turn in the conversation. Mike Elefante looked as if he had been sucker-punched. The board almost never asked for the Bancrofts' input. And the family had, in its restrained manner, stayed in what it had seemingly been trained to consider its proper place. Then, all of a sudden, with no preparation or transition, came the question of questions, just like that. The elephant had crawled into the room and lain down for all to see. Elefante, new to this game and the eccentricities and conflicts of all factions involved, must have felt as if the board was whispering, "Let's see if he can hit this one. Let's see if he can run with a changing game."

  Elefante remembered the family meeting at Hemenway & Barnes, the deafening silence that had followed the errant and occasionally obstreperous Billy Cox's offputting suggestion that Rupert Murdoch was going to be coming in with an offer. In a move indicative of the way the board and family had traditionally communicated and cooperated, Elefante and the Bancrofts hadn't actually shared this news with the rest of the directors. (No one really thought that Billy was completely sane or especially serious. It was just another instance of the troublemaker making trouble.) The relationship between family and non-family directors was superficially cordial but extremely reticent. In 2003, Vernon Jordan had blown up when he heard—after the fact—about Arthur Sulzberger Jr.'s acquisition overture to Hammer. "What the hell" were people like him doing on the board if the family was going to keep that kind of news private? Jordan had thundered.

  For their part the many directors did not entirely follow the party line that credited the Bancrofts with being the great protectors of Dow Jones's journalistic standards. Kann was the man for that. The Bancrofts, most of the board members believed, were merely slightly strange and somewhat ineffectual rich people who managed to allow Peter Kann to do his job. At best, they had shown themselves loyal even under the most abysmal of business circumstances. They were to be endured. Sitting on the board of the company that controlled the Wall Street Journal brought prestige, and most of the non-family board members believed that this was the Bancrofts' main interest.

  As the discussion continued, Zannino took the floor. He, more than anyone else around the table, knew what a dismal atmosphere the company was facing. Goldman had already done some financial modeling for him to show which companies could afford to buy Dow Jones. The most likely candidate according to the results of their work was News Corp. If the family was seriously going to consider a sale, Zannino had thought to himself that day at the meeting, they really needed to seriously consider who the buyer was likely to be.

  "I'm not sure where you guys are going with this conversation," Zannino began, taking up the subject of the sale, "but if you go down that road, you're not going to like the buyer who's going to be the most likely winner of the auction. When you go down the list, the most likely buyer is going to be Murdoch."

  Lisa, Leslie, and Chris eyed each other as the rest of the directors eyed them, watching for some significant reaction.

  "Maybe we should sell the company," Leslie said, in the throw-up-her-hands way she had when frustrated by the discussion. With that, she entered a realm of consideration that had been as strongly and strictly forbidden among the elder members of her family as habitual adultery or nudity at Thanksgiving. It was suddenly a different day, one in which the unmentionable had been invited out of the dark and into the discussion. Lisa lapsed into amazed silence.

  Then Christopher Bancroft leaned forward and spoke up: "Mike, when this used to happen, Roy Hammer would pound on the table and say, 'The company's not for sale.' What are you saying, Mike?"

  Elefante paused briefly, looking slightly pained before rousing himself to exclaim, with as much certainty as he could muster, "No, the company's not for sale." Elefante's power over the family was more than a historical and symbolic deference to Hemenway & Barnes. He and various partners at the firm held two out of three trustee positions on well over half of the family's trusts. The other slot was typically held by a family member, but no single Bancroft had as much voting power as Mike Elefante. He, like any other trustee, could be removed from his position only through the courts, a lesson some in the family would learn, somewhat painfully, in the coming months.

  The Bancrofts weren't ready to throw in the towel, they told Hock aday. All agreed that Dow Jones would continue as an independent company. It would not become another of those papers ruined by dull corporations without taste or integrity. The Journal would continue as the Journal, their Journal, their family's pride and their great-grandfather's legacy. As far as the board was concerned, Zannino was busy working on his plan for the company, and the family was happy.

  Something was shifting inside him. Sitting at the breakfast table with Murdoch that morning, Zannino felt his adrenaline begin to flow. "Yeah, I know the family says they don't want to sell," Murdoch said. "But the family has never had a number before. I have a number this time, and the number I'm thinking of is $60."

  "Holy shit," Zannino thought. For a split second, he wanted to excuse himself to go to the men's room and call his general counsel, Joe Stern. Stunned by the enormity of the offer, and the automatic weight and responsibility it thrust upon him as the CEO of a publicly traded company beholden to his shareholders, he took a moment to reply. "It's not my call. It's the family's call."

  "I'm not going to the family; I'm going to the board," Murdoch said, pausing. "So whom should I approach? McPherson?" he asked. "He's an academic and a new chairman. Hockaday? Nah, he'll go straight to the lawyers. What about Harvey? He's a savvy deal guy. I'm gonna go to Golub," Murdoch said. It was as if Zannino didn't even need to be in the room. Rupert had one last question, just to make sure they were on the same page: "So did I make you an offer?" he asked coyly.

  "Please, Rupert. No, you didn't make me an offer. You said you were thinking of making an offer, and you were thinking of $60 a share," Zannino replied, smiling. He didn't want the offer to come in to him at a private breakfast. Everyone would believe that he had invited this. Given that the family didn't want to sell, Zannino found himself in the cross hairs.

  "Fine," said Rupert.

  On the way back to the office, Rich called Joseph Stern. "You'll never believe what happened," he said. He told Stern the news but wouldn't repeat the number over the phone, within earshot of the driver. "I can't tell you now. It's nuclear. I'll tell you when I get back to the office," he said. Before Zannino got back, Murdoch had called Golub and left him a message.

  Back at the office, Zannino and Stern started making calls of their own. They alerted Art Fleischer at Fried, Frank, Harris, Shriver & Jacobson, Dow Jones's outside
counsel. They called the Bancrofts' lead trustee, Michael Elefante. Zannino told Elefante the news. "I just had breakfast with Rupert Murdoch and he said he's thinking of making an offer for Dow Jones for $60 a share," Zannino said.

  "Wow, that's a big number," Elefante replied.

  "What do you want me to say?" Zannino asked.

  "I don't know. I have to poll the family," Elefante said.

  The two hung up.

  "That's it, we're sold," said Stern, who was standing by Zannino for each of the calls. If Elefante couldn't say no right away, the deal was done. It was as if someone asks to buy your child, Stern later joked. If you say you have to think about it, that's a bad sign.

  When Peter Kann, the company's outgoing chairman, arrived at work later that day, Zannino and Stern told him the news. "Wow, that's a big number," Kann replied, echoing Elefante. "What did Mike say?"

  "He didn't say no," Zannino replied.

  Shortly after he got off the phone with Zannino, Elefante called Christopher Bancroft, Leslie Hill, and Lisa Steele. Each was startled by the news, but only one decided to immediately follow up with a call to Zannino. Leslie Hill, one of the most outspoken members of her family, was always a squeaky wheel in the boardroom. She had been eager for Zannino to take the helm and liked his energy and determination to change the company. His was just the kind of new thinking the company needed, she thought.

  Elefante told her Murdoch hadn't made a formal offer, but he had verbally floated a price to Zannino—$60 a share—and it seemed as if it was just a matter of time before a formal offer would come before the board. She was thrown. "Just when we were getting going on the right track," she thought. She immediately called Zannino to get the story firsthand. He told her about his breakfast with Murdoch. He talked about the benefits of the deal and mentioned that he was "a total return guy," referring to total shareholder return.