by James O'Shea
FitzSimons had all but abandoned the Zell proposal until Osborn, who chaired the Special Committee, told him that he had called Zell and asked him to revive his bid. “Bill Osborn told me, ‘Look, we need to fully explore this,’” FitzSimons said.
By March 2007, the intramural sniping among the bankers was in full swing. Morgan Stanley had quietly prepared a proposal that would have financed management’s self-help scheme, while Merrill Lynch had swung its full support behind the Zell plan. Merrill Lynch advisers who had once questioned the Zell deal had learned more about the ESOP, liked the higher price Zell had offered, anticipated improved Tribune cash flows due to synergies, and had confidence in Zell’s ability to do something he had implied to employees he would not do—impose deep cost cuts.
But Morgan Stanley’s Whayne said that Costa and Kaplan became big fans of the Zell deal because “they would make a lot of money—more debt, more fees.” Indeed, when Kaplan told Costa that Merrill could expect to earn $33 million to $35 million on fees from the Zell deal, Costa pushed back saying they should be “more aggressive.” When Kaplan questioned what his colleague meant, Costa replied, “More money.”
“The banks were climbing all over themselves to get into this deal,” said Kenney, “so much that Merrill Lynch, who was the strategic adviser to Tribune, resigned as the strategic adviser because . . . if you’re advising on the strategic alternatives, you can’t also be playing in the financing role, and at one point, Merrill said, ‘If we have to choose between being the historic adviser to the company or participating in this financing, we will leave you at the altar [because] we want to go plan the financing because there’s more fees.’”
In late March, Zell broke the logjam when he increased his bid to $34 a share and upped his personal investment to $315 million, part of an incredible deal in which the grave dancer would get a ten-year option to buy about 40 percent of the company for no more than $600 million. The Chandlers swung behind the Zell deal once they figured out that they could minimize their capital gains taxes. Even skeptics like Persily at Citigroup began to understand that the enhancements to the Tribune’s cash flow enabled by Zell’s unique structure made the finances of Zell’s deal comparable to management’s self-help plan, despite the higher debt levels. “That’s how I got comfortable. At the end of the day, there wasn’t that much difference between them,” said Persily. At the last minute, Zell also cut into the deal another big player—Bank of America, an institution that had a track record with Zell and Tribune and one he had been secretly courting since early March. To make room for Bank of America’s fees, he reduced the other banks’ share of the take, particularly Citigroup, with whom he had no relations. The Zell team also tucked into its proposal a provision that would reward key Tribune managers with a hefty “success” bonus if the deal worked. The Tribune Special Committee, elated to have found a complete solution to its problems in a single deal, approved of Zell’s deal with the company’s board on April 1, 2007.
There was no end of whooping and backslapping among the investment banks that won the Tribune lottery. At JPMorgan Chase, Sanjay Jain, the firm’s vice president, sent a note congratulating the bank’s Tribune team, including Peter Cohen, the bank’s Tribune client executive, pointing out that the bank’s chairman, Jamie Dimon, who once worked in Chicago, had been watching the Tribune deal closely. Cohen, who had flown to Chicago from a ski vacation in Aspen, Colorado, responded: “Thx dude. Can you say ka-ching!” At Merrill Lynch, Costa and Mohr got several “way to go” messages, including one from an investment banking colleague who colored his note with a tinge of caution: “Guys—truly amazing financial engineering. Even more kudos after reading [about the details.] In terms of applicability, my biggest question is can you (and would anyone really want to) do this.... Would any management team or Board really want to tighten the screws this much if they weren’t effectively forced into it and had no other options.”
But Jieun ( Jayna) Choi, an analyst at JPMorgan Chase, exposed, in a crude e-mail, the attitudes that then prevailed on Wall Street, where the banks had built a billion-dollar business collecting big fees for mega-loans that they made and quickly fobbed off on other investors:There is wide speculation that [Tribune] might have [taken on] so much debt that all of its assets aren’t gonna cover the debt in case of (knock-knock) you know what. Well that’s what we [the bank’s Tribune team] are saying, too. But we’re doing this ’cause it’s enough to cover our bank debt. So, lesson learned from this deal: our (here I mean JPM’s) business strategy for TRB, but probably not only limited to TRB is ‘hit and run’—we’ll s_uck the sponsor’s a$$ as long as we can s_uck $$$ out of the (dying or dead?) client’s pocket, and we really don’t care as long as our a$$ is well-covered. Fxxk 2nd/private guys—they’ll be swallowed by big a$$ banks like us, anyways.”
For their work over six months that ended in June 2007, Tribune paid the investment bankers and advisers a total of $146.7 million. Add to that the $14.2 million in other fees related to phase one of the deal and you get to about $161 million, more than enough to fund a newsroom that would bring news to the citizens of Los Angeles for a year and employ more than nine hundred journalists.
By now, FitzSimons had climbed on the Zell bandwagon, too, saying the company had the kind of strong cash flows to help pay down the debt encumbered in the Zell deal and that it would “reengineer” its operations to create more efficiencies. In other words, more cuts, mainly in staffing. Zell praised the deal, although he was singing from a different hymnal. The way he saw it, Tribune’s assets were worth $16 billion, and it was only taking on $12 billion to $13 billion in loans, far more than enough to cover any investors who owned the debt. Tribune shareholders approved the deal, too. Nearly 65 percent of the company’s shares outstanding voted, and 97.5 percent gave the deal a thumbs-up.
Even though anyone with an ounce of financial sense could see that the deal would generate inevitable cost cuts, I, and journalists like me, preferred to think otherwise. Hearing someone talk about a future that didn’t rely solely on cost cuts was music to our ears. As I listened to the new boss, I foolishly believed that I had just gained a partner in trying to figure out the correct mix of revenues and budgetary discipline to finance journalism. Not too long after the first phase of the deal had closed, my phone rang and the soft voice on the other end of the line threw me. “This is Sam Zell. You wanted to talk to me?” Zell asked. I had called Zell’s office after he’d given an interview to the Chicago Tribune, and I asked for equal treatment for the Los Angeles Times. Zell was polite and solicitous, telling me he was at Stanford University in northern California giving a speech, that he would be glad to talk to the Los Angeles Times, and that he would soon be heading my way to spend the weekend at his house in Malibu. To facilitate an interview, I naïvely offered to pick him up at the airport and drive him to his home, but he informed me his personal jet could easily deposit him near Malibu, one of Los Angeles’ most coveted, affluent neighborhoods. He said he would get back to me shortly with plans.
About an hour after his call, my phone rang. Zell said he would fly into the Signature Air offices at the Los Angeles Airport, where he had lined up a private room. My reporters and I could talk to him over refreshments. “Does that sound good?” he asked. After I replied yes, his tone assumed the hard, blunt edge I would hear often in the coming months.
“I was going to invite all of you to come to my house in Malibu until you sent a fucking reporter up there and scared the shit out of my housekeeper,” Zell barked. I was unaware that we had sent anyone anywhere near Zell’s house and asked what he was talking about. “Some guy named Lopez,” he responded. “Let me tell you something, you want to talk to me, call me and I’ll talk. But you don’t fuck with my employees. Got that?” I apologized if any of our reporters has scared anyone, and added that he must be referring to our columnist, Steve Lopez, who, I assured Zell, was a professional. I couldn’t imagine him bullying anyone, particularly a housekeeper. I
told Zell I would look into it and get back to him, but he hung up after telling me where we would meet early on a Friday afternoon. I asked Doug Frantz to find Lopez and learn what had happened.
A couple of days later, I watched as Zell’s huge jet pulled up to the Signature Air hanger and a diminutive, balding, elfish-looking, sixtyfive-year-old man with gray hair and a beard stepped off. He ranked number fifty-two on the Forbes list of the four hundred richest Americans and had a personal fortune estimated at $4.5 billion before the latest $39 billion sale of his real estate venture, but you never would have guessed it from his appearance. He wore his signature jeans, an open-collared striped shirt, and a rumpled blue jacket.
Zell may have known a lot about deals and finance, but it soon became clear he didn’t know much about the newspaper game. Any columnist worth his salt loves anything that adds juice to a column, and Zell’s reaction to a simple inquiry by Lopez had quickly elevated a spat over beach access in tony Malibu from a ho-hum column to an opportunity to publicly needle the new boss. I could see Lopez smiling as he gave his side of his story in his column, in which he affirmed his point of view to the new man in town:Zell lives a couple of hundred yards from the public beach in question. But since you have to go through gates to get to his place or to the surf, I thought it was only fair to ask if he knew anything about the dispute. So I rang the buzzer at his compound and a female voice answered on the intercom, saying he wasn’t in. I asked where he could be reached, then left my name and phone number.
A half hour later an editor reached me on my cellphone. He said Zell had heard about my visit and wanted to know why some guy named Lopez was harassing his house staff. He said he makes himself directly available to those who need to talk to him and he didn’t appreciate me upsetting the staff.
Wait a minute pal. I’ve harassed people before and this wasn’t harassment.
And another thing, Your plan for buying this company makes me a co-owner, so let me be the first to inform you that you didn’t buy another trailer park [a reference to a story we had run involving a trailer park owned by Zell’s firm]. This is a newspaper, and it’s our job to chase stories, even if it means knocking on the boss’ door.
Frantz showed me the Lopez column, which concluded that Zell’s property wasn’t involved in the dispute, and I told him to run it. As I introduced the Times staffers present at the airport interview, I told Zell that Lopez had explained what had happened in a column the morning after the exchange with his housekeeper. He clearly hadn’t read it, and I could see he didn’t intend to. But as quickly as his temperature rose at the mention of Lopez’s name, Zell reverted to his charming side, answering questions politely, smiling at reporters, particularly Sallie Hofmeister, then a deputy financial editor, who peppered him with queries about his plans. When she asked Zell what it was about FitzSimons that had impressed him, he dropped his bomb: “Did I ever say I was impressed with Dennis?” Zell shot back. “Did I ever say anything about Dennis? He is sincere. And I think he hopes the deal goes through.”
17
The Penguin Parable
On June 4, 2007, JPMorgan Chase and Merrill Lynch made a series of wire transfers of just over $7 billion to Tribune Company. Tribune used the money to buy back 126 million shares of Tribune stock at $34 each; pay Citicorp the $2.5 billion it had borrowed to fund the company’s 2006 stock buyback scheme; pay $1.46 million to the Wall Street law firm that had advised the banks involved in the deal; and fork over $161 million to the investment bankers that financed Zell’s acquisition of the company. The transfers and fees paid only for the first phase of Zell’s debt-laden takeover of Tribune Company, but that was enough for now: The transfer rescued Tribune shareholders of all stripes, including employees like me. The deal was on.
Love him or hate him, we all owed the grave dancer a vote of thanks. Without Zell in the picture, short sellers and other Wall Street sharks probably would have driven the company’s stock on the open market far below $20 per share. Investors who responded to Zell’s tender offer tried to sell back 90 percent of Tribune’s outstanding stock to the company, but the two-phase buyback had been structured so that Tribune would reacquire only half its shares during the first phase of the deal. So the company prorated the Zell offer and sopped up 52 percent of outstanding Tribune shares, leaving those still holding Tribune stock with the option to either sell them in the open market or hold them until phase two of Zell’s $34 per share offer kicked in, probably six months down the road.
The fire sale on Wall Street had a bigger impact in Tribune corporate suites than in the company’s newsrooms. Tribune journalists held stock in the company but not anywhere near the levels held by the people who had thrust the company into its mess. Many Tribune reporters and editors were just as interested in the comments that Zell had made at the airport as they were in the selling price of Tribune stock. Zell knew exactly what he was doing when he responded to Hofmeister’s question about FitzSimons, and his answer fueled speculation that the Tribune CEO was doomed, which was fine with most journalists at the Los Angeles Times as well as at the Chicago Tribune.
FitzSimons had shown little respect for print journalists and newsroom leaders wedded to traditional journalistic values, but he was particularly hostile to editors who he felt had slighted him, like Wolinsky at the Times, a paper that FitzSimons really liked to disparage. Just after telling me over breakfast that he didn’t think I’d accomplished much, FitzSimons came to a lunch with my top editors that Hiller had arranged. Hiller, who loved to attend gabfests, bowed out of this one, and I soon found out why. Midway through the lunch, FitzSimons asked everyone for their thoughts on the Wall Street Journal’s recent decision to place ads on page one of its paper. He knew the mere mention of the subject would cause indigestion around a table of editors who immediately attacked the idea. But he clearly enjoyed upsetting everyone, arguing that all papers would have to consider the appearance of ads on prominent page one. As he left the building to return to Chicago, he knew he had left me to deal with the fallout. “Sorry to do that,” he said to me with a smile, as I walked with him toward an elevator. “But I just had to come out here and drop that bomb.”
By then, the journalists in the newsroom of the Los Angeles Times had done what I asked of them on my first day: They had given me the opportunity to earn their respect, despite their skepticism about my ties to Tribune. And I had tried to live up to my word to make tough but fair decisions. Not everyone agreed with my approach, and some journalists probably agreed with FitzSimons. FitzSimons, after all, wasn’t the only one urging me to dump Wolinsky and editors like him who adhered strongly to the values that had been championed by Otis Chandler. Some of the more Internet savvy journalists saw the Wolinskys of the world as “old school” Times stalwarts who fought change simply to preserve their positions of power and influence. There was a kernel of truth to that. Wolinsky probably would have benefited from a change. But removing Wolinsky was hardly a priority for me at the time.
Some in the newsroom compared me to Baquet and thought I came out wanting. Baquet had spent more time talking about stories, signaling that he cared deeply about quality journalism. And it’s true, I didn’t walk the floor enough. It wasn’t as if I didn’t care about good journalism, as anyone with whom I’d worked at the Chicago Tribune could attest. But I had to face head on some of the issues that Baquet had deferred. Days after I’d arrived in Los Angeles, I had a long dinner and cigars with Baquet. He forecasted what I’d face when I arrived—of the strengths and weaknesses on the staff, the changes he’d put off because he spent so much time wrangling over the budget. At one point, I told my assistant Polly Ross to set aside one hour a day for me to roam around the newsroom to talk to reporters and editors. But inevitably, she reassigned those sacred hours for more pressing items of the day. All too often I agreed because I knew Ross was one of the few people I could count on to watch my back. I should have done better.
I also knew that running a newsroom was no p
opularity contest. I deeply respected Baquet. But I was not going to get anywhere trying to be like him. I had to be my own person, make my own decisions, follow my guts, and live with my decisions. I actually dealt with many of the issues that Baquet and I had discussed, like the paper’s Sunday magazine, which was losing $6 million a year. I cut the magazine staff, appointed a new editor, made it a monthly magazine instead of a weekly, renamed it the Los Angeles Times Magazine, and reoriented it to showcase profiles written by some of the paper’s best writers. By the time I left, it was nearly in the black.
But the biggest change I made at the Times involved the relations between the printed newspaper and www.latimes.com. Both Baquet and Carroll agreed that they, like a lot of editors around the country, had failed to pay enough attention to the Internet as a medium for news. When I took over, relations between the paper and its online effort were awful. Many Internet journalists viewed print reporters at the Times as stodgy old coots who didn’t get that the world had evolved to a new diet of news with more liberal standards. Journalists could no longer wait for the daily deadline to post a story; they had to do it now and be judged by how many people clicked on the story, not by how important it was deemed by some ivory-towered editor. Print journalists viewed their online brethren as a bunch of naïve kids unschooled in the basics of journalism and the standards that made the Times Otis Chandler’s newspaper. Both sides ignored one another, and almost all stories had to run in the newspaper before they got posted online. I knew that things had to change.
