The Deal from Hell

by James O'Shea

  Unterman listened to Fuller and said nothing in reply, until a few months later at another board meeting when he told Fuller that “things were changing in Los Angeles and that he might be able to do something.” The Chandlers, Unterman said, might be interested in a deal. Fuller then immediately informed Madigan and David Hiller, the original advocate of a Tribune–Times Mirror merger, and shortly thereafter Unterman had a meeting with Fuller and Hiller.

  In Chicago a few weeks later, Fuller set up a meeting at Madigan’s North Shore home to discuss possibilities. The Chandlers, Fuller learned, were far more embarrassed by the Staples scandal than anyone realized. “Tom said the Chandlers realized they couldn’t get much more out of Times Mirror through cost cutting and were angry and embarrassed by Staples. They wanted to find new leadership [for Times Mirror],” Fuller recalled.

  One of Unterman’s clients had sent him a copy of News Values, a book Fuller had written in which he argued that newspapers had to maintain a strong ethical backbone despite the economic challenges the industry faced. Unterman had confidence in Fuller, and the Tribune publishing chief impressed the Chandlers, too. When Unterman began to work his magic, things moved quickly and quietly.

  “We went there first, and then they [the Chandlers] came here to the Tower,” Madigan recalled. A string of clandestine meetings unfolded at the Sidley Austin law offices and the California Club in downtown Los Angeles. Willes was deliberately left out of the loop. “They [the Chandlers] didn’t tell Willes, and they didn’t tell the other directors,” Madigan explained. “They had all of this control [of Times Mirror], they had that high voting stock. They could just do this.” Willes had made Unterman’s job easier with his political naïveté. The steady stream of changes in his executive suite meant he had few longtime allies watching his back. Unterman, on the other hand, had solid ties to the family, a cunning mind, enough political smarts to fill the Grand Canyon, and good relations in his native Chicago.

  Even in his days at Salomon Brothers, Madigan wasn’t seen as a deal guy. His mentor, Ira Harris, considered him a strong corporate operations executive—someone good at imposing solid financial controls on a company, and a man who could maneuver easily in a boardroom. Putting together risky deals was not his forte.

  Madigan and Fuller were hungry for a deal with Times Mirror though, and Merrill Lynch, Tribune’s longtime investment banker, didn’t pull down big fees sitting in the financial bleachers. The Tribune Company was known as a careful, plotting outfit that maintained a steady lumber, not a quick step. Madigan and Fuller were determined to reverse that image. As events played out after Thanksgiving in 1999 and into the new year, both sides moved quickly and secretly, lest anyone discover a deal was in the works.

  In a move that surprised no one, the Chandlers had structured the terms of the merger to benefit their family, at the expense of minority shareholders. Overall, the Chandlers’ holdings gave the family 28 percent of all Times Mirror shares, but the family could still control Times Mirror, because their stock enjoyed super-voting status. In effect, Chandler stock was worth ten votes per share, while regular stock received only 1 vote per share. The price Tribune was willing to pay turned heads. Madigan and Fuller’s deal initially offered $92.50 per share to Times Mirror stockholders for shares then changing hands at about $47, a premium of nearly 100 percent. But, as Willes, Zimbalist, and non-Chandler directors soon learned, the family intended to exchange their Times Mirror stock for shares in Tribune, a move that would make the transaction tax-free to the Chandlers, while everyone else would get what was left of the stock pro rata, and the rest in cash.

  The end result? Non-Chandler stockholders would be responsible for paying income taxes on their profits. By March 2000, Madigan and the Chandlers sprang the news on everyone. As Willes recalled, “John and his people came in to make a presentation to our board about why this was such a wonderful combination. They talked about their television ventures, you know, Buffy the Vampire Slayer and all that. I just sat there and thought, this can’t be happening. I didn’t know whether to sit there and cry or stomp out of the meeting. Fortunately I did neither.”

  Zimbalist explained:It was a pre-cooked deal. After the meeting with Mark, we had a board meeting, and the Chandler representatives confirmed it. We lined up a committee of the independent directors and hired Goldman Sachs to advise us. Our objective was to make a good deal and make sure all shareholders got as good a deal as the Chandlers. The Chandlers and the Tribune guys were trying to ram the deal down everyone’s throat. The Tribune people were very directive and arrogant, telling us we had to do this and had to do that, ... that by law and precedent, if the controlling shareholder wants to sell, the board can’t stand in the way. They were friendly with the Chandler directors but hostile to everyone else. The independent directors were irate that the Chandlers hadn’t told them about the deal. The deal also had a “no shop” clause that said we couldn’t seek other offers. That rubbed the independent directors the wrong way. Everybody had lawyers and investment bankers working on this.

  Zimbalist and independent directors met in secret, too, to determine what to do: “We were trying to get some leverage, and we were looking at everything when all of a sudden this paralegal, a young woman, comes in with a big smile on her face. She found a clause in the charter of Times Mirror Corp. that said super-voting shares could not be voted as super-voting shares in a change of control. This meant they [the Chandlers] couldn’t dictate the terms.”

  An atmosphere of smugness prevailed in the downtown Los Angeles offices of Sidley Austin when Zimbalist, a clean-cut, steelgray-haired man, walked confidently into the conference room armed with his fresh intelligence about the company charter:We had an agenda and time table. Tom Unterman was there and a lot of other lawyers. I was a brand-new CFO. So I said, before we get to the normal agenda, I just want to say that we may have to slow down the process a little bit because we have to go out and see if we can get other bidders.... They all looked at me in this condescending way. They told me this is a “no shop” offer, kind of like this is the way things work in the real world, sonny. And I said, well, that doesn’t take into account Article 16 or whatever it was in the charter because it says the super-voting shares go away in these circumstances. Everyone stopped and looked at Tom and then they asked for an adjournment. It was kind of a beautiful moment. We slowed it down, changed the terms, and we did shop it around to two or three companies.... We showed it to Newscorp, the New York Times Company. But no one else could move fast enough. The tax structures we had in place were complex. Tribune used the same audit firm that had sold us these structures, so they were comfortable with them. We delayed things, but at least we felt we had tested the waters. We got the price up a little bit and we improved the terms.

  On March 10, 2000, Tribune started “management interviews and due diligence,” the proxy said, scrutinizing the details of the proposed deal and looking for problems, a process that should take months. On March 12, two days later, the Tribune and Times Mirror boards approved the deal. The Chandlers made quick work of Willes. Once the deal was agreed upon, Willes wandered the halls of the Times Mirror building. “He would cry very easily,” Wolinsky remembered. “It was waterworks for the rest of the time he was there.”

  During Willes’ tenure, the Times circulation rose, its operating profits soared at a compound rate of 25 percent, and earnings per share increased more than 50 percent. Some industry executives credited Willes with forcing a hidebound industry to face up to declining readership and a dubious outlook for long-term revenue. Willes raised some important issues, too. “Tom and everybody else were talking about putting our content online for free, and somehow make it up on the ad side. And I said, let me give you something to think about. If you are going to give away for free what you stand for, then what kind of message are you sending? It’s a message I don’t think you want to send,” Willes noted.

  But Unterman, who felt the Internet was the future, worried that Wi
lles devoted too much effort and resources to increasing newspaper circulation, which would continue to fall regardless of what the industry did. In addition, Willes had sacked 2,000 people and presided over a revolving door in his executive suites. When he left Times Mirror—only after loading the last of the Diet Coke in his fridge into the back of his car—Willes walked away with a severance package worth $64.5 million. For his part, Unterman, who by then had formed Rustic Canyon Partners—a company that would manage the Chandler family wealth—earned an $8 million dollar fee for working both sides of the transaction behind Willes’ back.

  As word reached Chicago on the evening of March 12, 2000, that a group of high-level Tribune executives (including Hiller, the executive in charge of Tribune’s development arm) were in Los Angeles, Lipinski and I headed into the Tribune Tower. Rumors had hardened enough for Tribune media writer Tim Jones to work up the story all weekend and prepare a draft. Lipinski and I began calling sources, trying to confirm the rumors and pry details from tight-lipped Tribune executives, whose reluctance to talk convinced us something was up. As we speculated on how the deal would work, John Puerner, publisher of the Tribune-owned Orlando Sentinel, took our call and heard us out. He was out in Los Angeles as part of the deal team, but said he couldn’t talk. He promised to call back, though, and at about 10:30, Puerner phoned and told us we were good to go; we could publish our story.

  The headlines the next morning stunned the industry. Tribune had acquired Times Mirror for $95 a share in cash and stock, a price that, in retrospect, would prove to be far too high. It was the largest deal in newspaper history, a combination of resources that made Tribune Company the third-largest media powerhouse in the country after Gannett Corporation and Knight Ridder. The difference was Tribune had hands down the best collection of quality newspapers in America: the Chicago Tribune, the Los Angeles Times, Newsday, the Baltimore Sun, the Hartford Courant, the Orlando Sentinel, the South Florida Sun-Sentinel , the Morning Call in Allentown, Pennsylvania, the Newport News in Virginia, and several small suburban papers just north of New York City that sold a combined 3.6 million newspapers every day. By then, Tribune Company had successfully acquired twenty-two television stations, making the broadcast wing of Tribune as large as a network with viewers in 38.4 million households in America, including stations in the nation’s three largest markets, New York City, Los Angeles, and Chicago. “Frankly,” Madigan wrote in a memo to employees that day, “the newspaper industry is consolidating, and the only way to survive and prosper in the face of this trend is to have greater size and scale.” Madigan explained that Tribune wanted to blend Times Mirror’s journalistic prowess with its broad media reach and realize synergies that would pay for the transaction: “A major portion of the value creation from this combination will be derived from faster revenue growth in our media businesses.” He predicted that by 2005, revenue growth combined with expense savings would generate an additional $225 million in cash flow. The combined company’s Internet audience would total 34 million, bigger than the websites of the New York Times and USA Today combined.

  On March 13, Hiller stood before the glass-walled offices of Sidley Austin, looking at the grubby streets of downtown Los Angeles below. Madigan was on the phone with Chicago Mayor Richard Daley, personally briefing him on the merger. His picture would soon grace the cover of Business Week magazine, and stories about Madigan and Fuller would fill pages of the Wall Street Journal, all because of an idea that Hiller had proposed the year before. Times Mirror stock had jumped 75 percent that day, rising almost $38 per share to close near $95 per share. Michael Costa, Tribune’s investment banker at Merrill Lynch, walked over to Hiller, warily eyeing the minute-to-minute trading stock on his BlackBerry. “He looked up at me and said the market is having a little difficulty with our deal,” Hiller later recalled. Tribune stock, which once had been valued at over $60 per share, had plunged to $27.75. As Hiller watched cars snake by on the streets below, Madigan approached and took in the underwhelming view. Glancing at Hiller, he looked at him and, without missing a beat, deadpanned, “Should we jump?”

  9

  Making News

  In early 1999, not long before David Hiller advised John Madigan to buy Times Mirror, an extraordinary series called “Trial and Error” ran on page one of the Chicago Tribune. The series blazed a trail of national coverage that would have historic consequences, even though it was news out of Chicago.

  In 1997, just after I had been named deputy managing editor for news, which gave me responsibility for the Tribune’s newsroom, legal affairs reporter Ken Armstrong stopped me as I strolled through the fourth floor of the Tower. He needed access to a LexisNexis database to research every death penalty case that had been appealed in the United States since 1963, and in Illinois since 1977. Database access would cost $18,000, a hefty price tag, given that Armstrong couldn’t guarantee the outlay would lead to a story. But his sources in the legal community had told him that many capital cases had been overturned because of prosecutors’ misconduct, and LexisNexis was the only way he could authoritatively document whether the tip was true. After a long discussion, I asked Armstrong to write me a memo outlining the proposed story, how he could take the coverage where no other paper had gone, why the Tribune should do it, and how the public and our readers would benefit from the coverage. Then I visited Joe Leonard, a high-powered Tribune editor, who controlled the newsroom budget with an iron fist, and got Armstrong the $18,000, which amounted to 30 percent of his salary that year.

  Over the next eighteen months, Armstrong plowed through a mountain of data. One search produced 11,000 court opinions. He read every one, poring over the data to extract leads and sources. Robert Blau, the paper’s projects editor, monitored Armstrong’s progress and soon recruited Maurice Possley, a Tribune criminal justice reporter, to help. When their research hit journalistic pay dirt, Armstrong and Possley hit the road, spending hours in courthouses, jails, prisons, bars, and kitchens. They interviewed lawyers, judges, professors, police, con men, crooks, the condemned, and grieving relatives. Every two to three weeks, Blau, a demanding and exacting editor, summoned them to his office for progress reports. Finally, after two years of exhaustive research, “Trial and Error” ran in the paper, carefully documenting how appellate courts had reversed 381 homicide convictions because prosecutors withheld evidence favorable to defendants, allowed witnesses to lie, and engaged in deception designed to win their cases at any cost, even if it meant a death sentence for an impoverished, innocent person with a lousy lawyer.

  Eight months later, Armstrong, Possley, and police reporter Steve Mills followed up “Trial and Error” with a series that mined the treasure trove of information generated by the data search. In four riveting parts, they published “The Failure of the Death Penalty in Illinois” and changed the parameters of the debate over capital punishment in America. Newly elected Illinois governor George Ryan put a moratorium on the death penalty in the state two months after the Tribune series ran. “A lot of people are like me. The death penalty was a fact of life,” he explained to a Chicago Tribune reporter. “But as people become more and more aware of the unfairness, they become less enthusiastic. I question the entire system and the people connected with it.”

  The following year, Possley and Mills produced “Cops and Confessions,” a series that exposed how Chicago police used forced, fabricated, and otherwise problematic confessions, often extracted through torture, to convict 247 people of murder in Cook County between 1991 and 2001. Not all readers appreciated the coverage. Some believed the freed defendants were guilty. But most readers expressed shock that the city’s police department could operate with such impunity and disregard for the law they had pledged to enforce.

  As an editor, I got the kind of rewards for the coverage that sends a tingle up your spine. On February 1, 2000, in Rome, Italy, the lights in the Coliseum burned for forty-eight hours to memorialize the death penalty moratorium Governor Ryan had imposed. Three years later,
in January 2003, late on the day he was released from prison, Aaron Patterson, a thirty-eight-year-old black man who had spent seventeen years on death row for murder because of a coerced confession, walked into the newsroom of the Chicago Tribune to thank Mills for a story that had saved his life. Years later in a farewell message to her staff, Lipinski would cite that moment as one of the proudest in her years as the gifted and principled editor of the Chicago Tribune. “I will not forget him telling Steve, ‘You’re a real life saver, man.’”

  By the time Tribune Company pulled the Los Angeles Times into its fold, the Chicago Tribune regularly produced groundbreaking journalism, the kind that generated a competition between the two papers that would become both healthy and troublesome. Even in the best of times, the Tribune never had a staff the size of its new sibling in Los Angeles. Brumback had infused into Tribune Company a phobia for seeking more staff. In my tenure as an editor, the Tribune editorial staff peaked at just over 700. When the company acquired the Los Angeles Times, its newsroom totaled nearly 1,200, a number that would become a highly divisive symbol of the tension that would flare between Chicago and Los Angeles.

  As the editor in charge of the Tribune’s foreign and national news, I was accustomed to being outgunned by the bigger papers with more reporters and had adopted an editorial mission to align my ambitions to serve readers with the size of my staff. I saw a paper like the New York Times, which had a foreign and national news staff twice the size of mine, as a journalistic floodlight that illuminated the news landscape with expansive coverage. I used the Tribune’s smaller foreign and national news staff of forty correspondents as a spotlight that focused on issues in the news, deploying my correspondents to write in-depth, enterprising stories that broke new ground or made sense of the day’s events. Bringing the staff along on that mission wasn’t easy. Journalists are highly competitive; they want their bylines on the big stories. But the strategy eventually sunk in, particularly after George de Lama, an excellent journalist, became my deputy and pushed me to bring enterprise to the news of the day, too. Eventually, the strategy evolved into a special brand of journalism.