Conrad Black

by A Matter of Principle

  The investment firm Tweedy Browne now represented to all who would listen that the Hollinger International shareholders had been paying for the Ravelston owners to service the loan on the basis of which their control of the company was maintained. This was presented to skeptical shareholders and the cynics in the financial press as a self-serving round trip that caused us to inflate the management fee. As has been mentioned, the loans in Ravelston had been subscribed to buy large numbers of single-voting shares that were not necessary for the exercise of control and inflicted inconvenience on the controlling shareholder while demonstrating our confidence in the company.

  This incorrect thesis was taken up and magnified by competing media companies. We now had a steady problem debriefing many of our own personnel. The fact was, we chose to redirect a large part of our income to pay interest on loans subscribed to buy and hold the largest possible shareholding in our company, instead of simply stuffing ourselves with cost-free options like Alsatian geese (and like most non-owner managements).

  Only three days were required to sell out this issue, and we had the undoubted pleasure of paying the banks completely out. We had ended the nightmarish banking liquidity problem but enjoyed only a one-month escape from the endless drumfire of financial harassments before new problems arose to torment us.

  At the request of the chairman, Barbara and I invited the CIBC’s present and former directors to the annual dinner (which occurs on the evening of the annual shareholders’ meeting) at our home in Toronto. This was the first time this dinner had not been hosted by the bank itself. We dined in the boarded-over swimming pool; Barbara suggested that we might want to arrange it so that we could dunk selected board members by pressing a button. The evening felt convivial to me, though Barbara, as usual when she was the hostess, felt it was a complete disaster. Still, it seemed to mark the end of a difficult period in our banking arrangements. Of course, appearances can be deceiving.

  As the second Wachovia transaction closed, we settled in to a month of spontaneous relaxation in our new home in Palm Beach. The only cloud on the horizon was the issue of Can$100 million of Hollinger Inc. Series III preferred shares that was due for redemption in April 2004. Thirteen months would normally be quite enough time to take care of redeeming them. But Torys now told us we had to issue a liquidity warning on our Series III preferred shares, although they had given no hint of this as the second Wachovia transaction was being negotiated and marketed.

  Hollinger Inc. was technically, for tax reasons, a mutual fund. That meant all shares had to be retractable – that is, shareholders had the right to cash out at any time. The announcement that Torys told us we had to make would guarantee that shareholders would exercise this right with the Series III preferred shares; a precautionary warning could be reasonably assumed to cause a stampede of shareholders demanding redemption of their shares, rather like a run on the bank. This was a tedious re-enactment of a familiar story line. Our own advisers expected to be well paid to enlighten us about the negligence of their previous failure to advise us of dangers that they now triumphantly unveiled and demanded be disclosed. If we had had some warning of this problem, we would have tried to secure a larger bond issue from Wachovia or to make a less explicit arrangement with the independent directors, to ensure the cash flow to the company.

  The announcement that Torys had pushed us into making precipitated a supreme financial crisis. Though we worded it as innocuously as possible, it could not fly under the radar. After Reuters prominently ran the initial story, our enemies immediately recognized the potential and pounced on us like leopards. An especially mouthy Bloomberg correspondent was close behind them. I was not surprised at the sadistic delight of the Guardian, but the immediate, venomous, and relentless malice of the Murdoch newspapers was more damaging and also unexpected. The chief assassin in the financial pages of the New York Post told our vice president of investor relations that Hollinger was his principal assignment.

  This particular vice president, Paul Healy, had been a large part of the problem. He emerged unsuspected as a key player in a dangerous role. After a head hunter identified him for us, Radler and I had hired Healy away from the mergers and acquisitions department of the Chase Manhattan Bank. He had been given about three hundred thousand options (his salary and bonus combined were at or above $500,000 a year for his last years). Healy believed that our method of paying management fees and non-competition payments had reduced the share price and deprived him of his rightful rewards as an option holder. He had helped build a Trojan horse by recruiting investors and analysts who were “value investors,” which in practice meant greenmailers who would rely on the mantle of corporate governance to cause as much commotion as possible and try to force a sale of the company. I was aware of his views but tolerated his antics. In truth, my reluctance to fire Healy was based on my calculation that firing him would cause even more problems than keeping him. This was a delicate time, and the last thing I needed was him calling up all our large and institutional shareholders to say he had been sacked because he had discovered bad things. He was so deferential in my presence, and so easily converted to flashes of supportiveness, that retaining him with suitable pep talks from time to time seemed the best course tactically until the problems had been resolved. I was looking at methods of privatization. Had that been accomplished, all our problems would have been solved. Meanwhile, I was being assaulted by a Jurassic predator in the form of Rupert Murdoch, with whom I had thought I was conducting a civilized competition.

  Soon the London Sunday Times managed to make a malignant connection that would prove very intractable. It located the inimitable Laura Jereski of Tweedy Browne, who jubilantly told the reporter that I did not “run Hollinger in the shareholder’s interest.” I wrote Christopher Browne that this was an outrageous assertion and an idiosyncratic way for the company’s third largest shareholder to promote the company’s stock. Of course it was obvious that what Browne was saying would not likely raise the stock price. Especially because Murdoch trumpeted the financial pressures on Hollinger Inc., Browne would have sensed the possibility of forcing the sale of our company at going-concern prices, enabling him to reap a full profit at enterprise values (twelve times operating profit rather than the seven or eight multiple in the stock market). He could flex his muscles before the whole financial community.

  Browne believed that now was the time to sell the whole company and take the best profit on his stock. I thought he was wrong and told him there would be no buyers for the whole company, the time was not right, and we were better to continue with piecemeal sales such as we had successfully made. The Telegraph could easily command a good price on its own (and did two years later), but we knew it would hold that value if managed properly while we polished up the rest of the company. No one could be more sensitive to where the Telegraph’s value was going than Dan Colson and I. We sniffed the air and analyzed the water around it every morning – as we had to in shark-infested London. We felt we needed to find buyers so keen to get it that they would buy up everything Hollinger International owned at a top price and sell off the less sought after assets themselves. This view would soon be justified by events.

  Despite our disagreements, I tried to develop some common ground with Browne, but his terms were impossible. His guru was shareholder activist Herbert Denton, who once famously declared that assaulting corporate management was “the most fun you could have while keeping your clothes on.” (When I eventually met him, Denton seemed to me slight and bookish and unlikely to be overly riotous and hedonistic when liberated from his clothes, but so, I suppose, did Groucho Marx and Woody Allen, from whom he stole the line.) Essentially, Browne wanted to pack our board and begin investigating the company in order to unearth anything useful as ammunition to oust me. We were to conduct a corporate self-torturing exercise directed by Browne against us at our expense. Unable to do that immediately, he resorted to scattergun allegations: a Hollinger International bond issue promised to tra
nsfuse money in stipulated amounts to Inc. – this was fiction. I had put a poison pill in the bond issue so that a change of ownership would be a default. I explained that provision was there at the insistence of the buyers, who regarded our control as essential to the company’s future (which proved to be accurate). Without any acknowledgement of error, Browne would simply move on to other huffs and puffs. An enemy axis under the informal direction of Healy and Browne materialized. A Baltimore media analyst for Jeffries & Company produced a buy recommendation on our stock, on grounds that if management fees were to be reduced, the whole structure would collapse and we would have to sell the company.

  By the beginning of 2003 the atmosphere around Hollinger was confused and ominous. I opened discussions with Bruce Wasserstein, chairman of Lazard, to talk over a range of proposals for our future, including, for the first time seriously, a possible sale of it all.

  Southeastern Asset Management, the second-largest shareholder after Hollinger Inc., and who were still supportive, popped up as the atmosphere became heavier and said they would be prepared to work out an arrangement with us if we were prepared to give up the super-voting shares, even gradually. These shares were a bugbear to Southeastern, although Browne was not at all concerned about them. Browne was scandalized by the management fees and the non-competition payments, but the Southeastern managers, Mason Hawkins and Staley Cates, thought we had earned every cent of these payments. Pressed financially and by the corporate militants, I began negotiating with Southeastern as I prepared to depart London for the Bilderberg meetings at Versailles. Bilderberg had brought me good fortune in the past – it was there I made the contacts that led to the purchase of the Telegraph.

  In between the sessions at Versailles, I was on the telephone with Cates in Memphis trying to work out a deal that would resolve the Hollinger Inc. liquidity issue, reinforce us against the emerging assault on the management fees and non-competition payments, and not require us to surrender control of the company. The conversations were cordial and we made progress. These conversations were still underway when Barbara and I departed London for New York on the evening before the 2003 annual meeting.

  On the day before the meeting, Tweedy Browne had filed a 13D (a Securities and Exchange Commission public filing of material interest to the shareholders) as a hostile shareholder and were demanding a special committee of the directors to investigate all the complaints they put in their 13D filing and the accompanying letter, specifically about the management fees and non-competition payments, which they represented as “misappropriations of funds.” At that point I had no idea what such a filing from a Special Committee really meant and I certainly had no idea that there was any legal vulnerability. I reached a tentative arrangement with Cates and Hawkins that we would sell them between 5 million and 10 million Hollinger International shares at $11.60, a 15 per cent premium to current market (which had risen from $7.50 since March). There would be a five-year phaseout of the super-voting rights, in which time we would hope to have bought in and cancelled enough shares and exercised enough options to restore a substantial portion of voting control. (I owned 65 per cent of Ravelston, which through its 100 per cent subsidiary, Argus Corporation, owned 78 per cent of Hollinger Inc., which owned 30 per cent of Hollinger International but had 70 per cent of the votes because it owned all the Class B shares, which had ten votes per share.)

  There would also be a payment, to be negotiated and independently approved, from Hollinger International to Hollinger Inc. for surrendering the super-voting rights, and a voting agreement with Southeastern that would assure our control beyond five years. Southeastern were free to sell their shares at any time, though they had a brief first refusal arrangement with us. Southeastern would support a management fee of $20 million and a limit of $6 million to me personally (which was twice what I have ever received) because I had contributed so much of my part of the fee to paying interest on loans that sustained our shareholding in single-voting shares. This was a good agreement to be pulled out of the hat at this late stage, hours before the annual meeting – a meeting for which our corporate governance enemies were clearly well prepared and which would likely see open hostilities.

  There was a big press contingent in front of the Metropolitan Club as we arrived. The (London) Sunday Times reporter mouthily asked whether I was overpaid. I suggested that he probably was but that I was not. All the independent directors were present except Henry Kissinger, who had a meeting of the Eisenhower Foundation. Jim Thompson, the former governor of Illinois, even missed a meeting of the committee to investigate the events of September 11, 2001, to attend.

  I gave an upbeat summary of events in my remarks. I mentioned that we had made an ex gratia cut of $2 million in our management fee in 2003. I also acknowledged that some matters could be handled less controversially. Because our office in London was in the Docklands and my home was in Kensington, which was a much more convenient place for many people to meet me, one-third of the salary of a butler and one-half of the salary of a chef (who also worked intermittently at the Telegraph) were on the company’s account. I announced that the practice would cease, as would the practice of the company paying a share of the maintenance costs for my apartment in New York, even though my main reason to be in New York was a corporate one.

  I allowed Jim Thompson to take the podium briefly to say that he would be setting up a special committee. It became clear that he had even less idea than I did about what a special committee in the corporate relations culture of the time consisted of because he thought that he and the rest of his Audit Committee would transmogrify into the Special Committee. I assured the shareholders that I was happy with the Special Committee and would welcome any fair analysis of our corporate practices. I said then, and still believe now, that we had been exemplars of full disclosure, even to our own public relations disadvantage, as in the revelation of the payment of one-third of the salary of my butler in my home, even though it could lead to accusations of self-indulgence.

  I outlined the arrangements with Southeastern, and then Southeastern’s Mason Hawkins took the microphone and credited my associates and me with creating $2 billion of value and running an excellent company. He defended the non-competition payments and said that a $20 million management fee was earned and defensible. Christopher Browne, Laura Jereski, Herbert Denton, Lee Cooperman, and others intervened in a fairly direct but perfectly courteous manner. I had no problem responding to them and took a particularly strong line with Cooperman.

  Cooperman said that Hollinger was underperforming its peers, an argument he and I had gone over before. I pointed out that the companies he had in mind – the New York Times, Washington Post, Dow Jones, Chicago Tribune, Gannett Company, and Knight Ridder (most of whom were also managed by super-voting shares, and most of which would soon be in desperate straits) – were not our peers. The assets we had taken over, principally in London and Chicago, had been basket cases when we got control of them. We were building them into powerhouses, like the monopolies owned by all the companies Cooperman purported were our peers. It was precisely because we aspired to become, and believed Hollinger could become, a peer of such companies that we had all invested in it. I pointed out to him that he had piled into Tyco, which was then in a state of collapse with the senior management under indictment, and I could more justly criticize his judgment for squandering his clients’ money in Tyco than he could object that we did not yet own a New York Times.

  The meeting had been held up for a few minutes while Southeastern’s Hawkins and Cates tried to persuade Browne to withdraw his 13D in light of the arrangements we were making. Browne declined. There was skepticism from the start on the part of Tweedy Browne, especially from Laura Jereski, that anything would come of the Southeastern agreement. On the immediately succeeding days there was a beleaguering variety of calls about implementation, given that the stock we would be selling them was entirely pledged in the second Wachovia bond issue. I explained different methods to im
plement the arrangement – in particular exercising our right to pay down the notes substantially and doing so with the proceeds of the share sales to Southeastern, or bringing a new investor into Ravelston and applying the proceeds of that investment to purchase for cancellation of some of the notes, freeing some of the shares for Southeastern, and repeating the process with the proceeds of those sales.

  The meeting ended agreeably enough, even though Christopher Browne had nominated himself as a non-director member of the Special Committee, a suggestion so presumptuous I ignored it. Gordon Paris, a debt market adviser who had travelled from firm to firm with no great distinction but had been useful to us in some of our transactions and in the first Wachovia underwriting, had been elected a director to comply with the Sarbanes-Oxley Act requirement of including a designated financial expert.

  The directors meeting after the board meeting was upbeat, and everyone thought we had come through a difficult challenge quite well. Unfortunately the manager of the Metropolitan Club had ruled that the working press was not welcome inside. We advised the journalists to walk around the block and come in claiming to be shareholders and said we would vouch for them. This was less attractive to journalists than pretending to have been barred at our instruction and then making up out of whole cloth their description of the meeting. Such a technique was employed by Murdoch’s newspapers as well as by the Financial Times. Nevertheless, analysts’ coverage and press comment on the meeting was extensive and rather positive.